FEDERAL COURT OF AUSTRALIA
DATE OF ORDER:
THE COURT ORDERS THAT:
The interlocutory application be stood over to Tuesday, 12 April 2016 at not before 10.30 am.
1 This is an interlocutory application made by the Applicant, W.R. Berkley Insurance (Europe) Limited, to which I will refer as WRBIEL, that being the acronym one finds in the evidence.
2 The interlocutory application is made as part of an originating application made under Division 3A of Part III of the Insurance Act 1973 (Cth) (the Act). The originating application is for the confirmation of a proposed scheme for the transfer of all of the insurance business of the Australian branch of WRBIEL to the Australian branch of Berkley Insurance Company, to which I will refer as BIC. The nature of that transfer and what is involved will become evident in a little detail in these reasons.
3 The interlocutory application is brought to deal with s 17C(2)(c) of the Act. Under s 17C there are various steps required to be taken before an application for confirmation by the Federal Court of the transfer or amalgamation of insurance businesses. Relevantly, that section provides:
17C Steps to be taken before application for confirmation
(1) In this section:
"affected policyholder” means the holder of a policy affected by a scheme. "approved summary” means a summary approved by APRA.
(2) An application for confirmation of a scheme may not be made unless:
(a) a copy of the scheme and any actuarial report on which the scheme is based have been given to APRA in accordance with the prudential standards; and
(b) notice of intention to make the application has been published by the applicant in accordance with the prudential standards; and
(c) an approved summary of the scheme has been given to every affected policyholder.
(3) Without limiting the provision that may be made by the prudential standards for the purposes of paragraph (2)(b), the notice referred to in that paragraph must include, in relation to each body corporate affected by the scheme, details of the place and time at which an affected policyholder may obtain a copy of the scheme.
(4) An affected policyholder is entitled, on the person’s request, to be provided by the company with one copy of the scheme free of charge.
(5) The Federal Court may dispense with the need for compliance with paragraph (2)(c) in relation to a particular scheme if it is satisfied that, because of the nature of the scheme or the circumstances attending its preparation, it is not necessary that the paragraph be complied with.
4 As can be seen from s 17C, and as one would expect, the persons who may be affected by the commercial transfer for which confirmation is required, are required to be given notice of it. Section 17C(2)(c) refers to affected policyholders, and indeed every affected policyholder.
5 For the reasons that will become apparent, it is unlikely to be possible for the Applicant, WRBIEL, or BIC to identify every affected policyholder, if that phrase is to mean the ultimate entity or person who may have an insurance claim as a party to a policy or as someone with rights under a policy that was ultimately issued by WRBIEL. For that reason, the application is made, in effect, to have a dispensation from strict compliance with s 17C(2)(c). That dispensation can be given by the Court under s 17C(5) if the Court is satisfied that, because of the nature of the scheme or the circumstances attending its preparation, it is not necessary that the paragraph be complied with. The subsection is framed in terms of necessity. As I have said, it is not possible, in all likelihood, that section 17C(2)(c) could be complied with. Nevertheless, I need to be satisfied that it is not necessary that the paragraph be complied with.
6 It is now appropriate to identify what is involved and why ultimately, subject to some matters as to the form of the notice and where it is to be published, I am likely to grant the dispensation sought subject to compliance with conditions, which I will identify and which have been propounded in draft orders.
7 The evidence before me is in the form of three affidavits and one exhibit. The first affidavit is an affidavit of the partner from Clyde & Co responsible for the conduct of the proceedings, Mr Dean Carrigan. The second and third affidavits are the substantive evidence for the application and those affidavits were sworn by Mr Christopher Richard Flanagan on 6 and 8 April 2016. Mr Flanagan is the Regional Compliance Officer of BIC and has been with the Berkley group on a contracted and employment basis for three years. He has been in the insurance industry for many years prior to that. He is the person who is responsible for, if I may put it, the conduct and management of the transfer of this business. He is, in the parlance of the company, the project manager for the scheme. That responsibility includes the responsibility for the compilation of a register of policyholders.
8 The two affidavits to which I have referred deal in detail with the search for the names of the various policyholders. I now need to explain the business involved and the structure of that business to explain why it is not a reflection of bad practice or business methods that a significant number of potentially affected policyholders are not known by WRBIEL or BIC or their addresses are not known.
9 The totality of the insurance business to be transferred from WRBIEL to BIC is comprised in four sections or segments of business that are described in the first affidavit of Mr Flanagan. I will first of all describe those segments and the reasons why in some of them it is difficult to know with precision or completeness the identity of the potentially affected policyholders or their addresses.
10 Segment A is straightforward. It is comprised of insurance contracts introduced to WRBIEL by over 500 general insurance brokers. This is the straightforward introduction of insureds to a prospective insurer, WRBIEL. The names of virtually all these policyholders are known because the introduction was by a broker to the insurer, WRBIEL. There are some 109 missing addresses through whatever oversight or error that may have been involved, but the vast majority of over 12,000 policyholders are known. The business involved in this Segment is professional indemnity, general liability and a small amount of commercial motor and fleet products.
11 Segment B is comprised of policies issued on behalf of the Applicant by so-called coverholders and managing general agents. These are policies to which WRBIEL is the primary insurer. The coverholders and managing general agents are not insurers under the policy. As will be shown in a moment, however, the commercial reality of life in business is that, to the extent that these coverholders, general managing agents and underwriting agents seek to develop their business, they view the insureds who take policies in the business arrangements through the coverholders and managing agents as their customers. This will become relevant to understanding why it is that some of the coverholders and managing agents are not keen to assist with the names and addresses of all who have taken out policies with WRBIEL under these arrangements. This Segment consists of professional liability, public liability and medical malpractice, and some limited property risk.
12 As I have indicated, under this arrangement the direct relationship in a commercial sense with the policyholder is undertaken by the coverholder or managing general agent who markets the designated products on agreed pricing and policy terms bases. The arrangements are entered with insurance brokers to distribute the products to policyholders, and underwriting, policy issue and claims management is carried out by the managing general agent pursuant to the terms of agreement. WRBIEL and the brokers control and manage the policyholder relationship. In Segment B, WRBIEL receives policyholder bordereaux report from the broker or the coverholder at an agreed frequency, and the policy bordereaux generally only contain policyholder names and no other contact details. There were 17 binder arrangements relevant to the Segment B business and attempts have been made, as set out in Mr Flanagan’s affidavit, to understand who the policyholders are by writing to those 17 institutions.
13 The responses from those entities, being the coverholders and managing general agents, are set out in the annexures to the affidavit of Mr Flanagan. For some of the coverholders and managing general agents, being Queensland Underwriting Services (QUS), Focus, Experien, Insurance House and Gallagher’s Herbal Life binder arrangements, there has been able to be retrieved the names and addresses of policyholders of over 14,000 persons or entities. There are other coverholders and managing general agents set out in annexure CF4 for whom WRBIEL has not received that same information. Generally speaking, those other coverholders and managing general agents have been uncooperative in providing the information of those whom, generally speaking, they consider to be their customers.
14 Segment C is comprised of master policies. There are 9 master policies that have been transacted between WRBIEL, a broker and a relevant master policyholder. These master policies fall into two groups. The master policies are with institutions or industry groups or industrial organisations or industrial associations. They cover medical malpractice, public liability, product liability, professional indemnity and directors and officers risk. The two groups to which I have referred are individual master policies and group master policies.
15 An individual master policy is a policy which has been written by WRBIEL for people in a particular retail or other group. Cover attaches to an individual if that individual applies through a broker for coverage under that master policy. Thus, for instance, the ASCA Strength & Conditioning and the Crossfit Affiliates are from their names two master policies for persons or entities in the health and fitness industry. If someone who runs a business, whether it be a gym or some other such business, wishes to obtain cover under the master policy, that entity would apply to the relevant broker.
16 The second type of master policy is the group master policy, whereby WRBIEL agrees to give the type of cover to which I have referred to members of the relevant group. Two of those groups are the Australian Nurses Federation in different states. One group policy is the members of the Australian Nurses Federation (South Australia), another is the members of the Australian Nurses Federation (Victoria and Tasmania). By these policies, WRBIEL agrees to provide cover for persons who fall within a definition which in effect is persons from time to time who are members of the relevant nurses’ industrial organisation and have either certain qualifications or who are seeking to obtain those qualifications.
17 Thus one can see immediately from looking at Segment C and the group policies why it would be that WRBIEL did not have the names and addresses of all those persons. An issue might arise to which some discussion, and in respect of which some discussion took place, about whether the individual nurses, as it were, were potentially affected policyholders or whether the organisations set out in CF6 were the affected policyholders. The application has been made on the basis of an assumption that the broader group of those who obtain the benefit of the ultimate insurance are the affected policyholders. That assumption is one that in my view is soundly made, although I do not need to decide that as a matter of law.
18 That assumption is at the base of this application, and in my view, it is a satisfactory and wise assumption. The result of the attempts to obtain cooperation from those entities to whom the master policies are issued is set out in Annexure CF6. Some will and some will not assist. Again, the information which WRBIEL obtained in the ordinary course of business was found in bordereaux and policy schedules delivered by brokers in relation to these policies. In relation to the five individualised master policies, where individuals actually apply to brokers for cover, there are known to be a particular number, namely 418, underlying insureds.
19 On the other hand, the group master policies of the kind for the Nurses Federation have likely many more underlying insureds, and the assessment of Mr Flanagan is 85,000. But for all these policies, including the group policies, there is a broker who manages the relationship with the master policyholder. The master policyholder is the organisation of the kind to which I have referred i.e. ASCA Strength & Conditioning, Crossfit Affiliates and the Nurses Federation groups. Others are the Australian Institute of Radiography, the Senators and Members of the Australian Commonwealth Parliament, the National Footwear Retailers Association and the Institute of Mercantile Agents.
20 Segment D comprises policies issued on behalf of the Applicant’s i.e. WRBIEL’s United Kingdom office by Australian coverholders and managing general agents who are introduced through a London market broker to WRBIEL’s United Kingdom office. It is not clear to me on the evidence, other than through a statement in paragraph 44 of Mr Flanagan's affidavit, that it is necessarily the case that the policyholders who may be the insureds under this business will necessarily be Australians. That assumption has been made in Segment B as that Segment involves business introduced to coverholders and managing general agents by Australian brokers. This business is introduced by London brokers.
21 The evidence today included oral evidence from Mr Flanagan, who has indicated that he can make further searches of the records to understand with somewhat more precision why it is he says in para 44, line 1 of his affidavit that the business here is policies issued in Australia to Australian policyholders. Once that is clear, I can then make a decision as to the location of the newspaper advertising that should take place. I will come to that issue later, but if I think that there is a reasonable basis to believe that some of the ultimate policyholders in Segment B will be parties who have a English connection, or a non-Australian connection, I will require some advertising in appropriate newspapers in the England and London, as well as in Australia and its capital cities.
22 The evidence of Mr Flanagan provided a draft actuarial report which has been substituted by the tender in Exhibit A (CF10) of the final actuarial report prepared by Mr Warrick Gard, a Partner in the financial services sector of EY. I do not propose to deal in these reasons with the full details of that actuarial report. It is sufficient to indicate that the conclusions Mr Gard has reached, which will be analysed in more detail on the confirmation application, are that there will not be a materially detrimental impact on the policyholders of either WRBIEL or BIC for broadly six reasons, one of which has two parts to it.
23 These reasons set out in pages 3-4 of Mr Gard’s report are as follows:
1. There is a benefit to WRBIEL's policyholders that arises from being part of an insurer with significantly more net assets (i.e. $165.7m compared to $63.5m). An example of where this benefit arises is where one unusually large claim occurs prior to the Proposed Transfer which could have a material impact on the capital available to satisfy any other claims made by the policyholders of WRBIEL. However, such a claim would have a lesser impact as a proportion of the net assets of BIC after the Proposed Transfer.
2. WRBIEL's solvency coverage ratio at 31 December 2015 is 2.359, and following the Proposed Transfer, the solvency coverage for BIC is estimated to be 1.648.
3. The post Proposed Transfer solvency coverage ratio of 1.648 for BIC still offers WRBIEL's policyholders substantial protection due to the benefits arising from being part of an insurer with significantly higher net assets and capital base. The post Proposed Transfer solvency coverage ratio is within WRBIEL's target range of 1.40 to 1.75 and within BIC's target range of 1.55 to 2.00. Hence…there will not be a materially detrimental impact on the policyholders of WRBIEL by the reduction in the solvency coverage.
4. There is a benefit to WRBIEL's policyholders that arises from being part of an insurer with far higher diversification benefits. BIC will have a more diversified risk pool following the Proposed Transfer that comes from having non correlated claims experience. This potentially means that despite having a lower solvency coverage ratio, BIC may have a lower probability of breaching the target-solvency coverage ratio.
5. There is no material detrimental impact to BIC's existing policyholders from a capital perspective arising from the Proposed Transfer due to the size of BIC's capital base and the value of WRBIEL's insurance liabilities being assumed by BIC pursuant to the Proposed Transfer
(a) WRBIEL's net insurance liabilities being transferred to BIC at 31 December 2015 of $82.3m is small when compared with BIC's net insurance liabilities at 31 December 2015 of $304.1m
(b) BIC’s solvency coverage ratio at 31 December 2015 is 1.923, and following the Proposed Transfer, the solvency coverage for BIC is estimated to be 1.648, which falls within BIC's target range of 1.55 to 2.00.
6. BIC has been undertaking claims administration for policies distributed and underwritten by WRBIEL in respect of its Australian sourced business through an outsourcing arrangement following the transfer of claims management staff from WRBIEL to BIC since 1 October 2014. Claims will be managed in the same way and by the same staff after the Proposed Transfer. Therefore there will be no impact on the management of claims following the Proposed Transfer. In relation to the UK Binder business, claims processes will remain unchanged however the oversight of the management of these processes will be undertaken by the UK head office Claims Management as part of a proposed outsourcing arrangement with BIC.
24 The orders sought have been submitted to me and are substantially as requested in the interlocutory application. On the material put to me today, including the oral evidence of Mr Flanagan and the submissions of parties, I would be prepared at the moment to make orders subject to being satisfied of a number of things.
25 I should say at this point that Mr Tran appears on behalf of the Australian Prudential Regulatory Authority (APRA) and has indicated that APRA has no objection to the dispensation orders being sought today. He informs me, and I accept, that APRA has been involved in communication with WRBIEL and lawyers on behalf of WRBIEL, and APRA has made comments on the scheme thus far and the steps intended to be taken thus far, and does not object to what is proposed.
26 The three matters to which I wish to make comment and which will or may need to be incorporated in the orders are as follows. I think, on reflection, that the approved notice referred to in paragraph 4 of the draft form of orders should be placed in the publications mentioned in (b) and (c) on more than one occasion at least a week apart.
27 Secondly, I need to be persuaded that Segment D business has no London connection. If it does have a London connection, then publication in English and London newspapers of equivalent standing to what appears in paragraph 4(b) and (c) of the draft orders would be appropriate.
28 Thirdly, I think the notice for publication in those newspapers and anywhere else that this notice appears should be amended. The Court should be identified as the Federal Court of Australia. More importantly, however, there should be one or more paragraphs drafted by those with responsibility for this application and put to the Court which describe in plain language matters that are likely to bring to the attention of those who are affected policyholders the fact that they may well be affected policyholders.
29 I need to explain. Segment A business is unlikely to need any more clarification in this notice. Segment A business is parties who were introduced to WRBIEL as an insured through a broker in the simple broking function. Therefore, to say that something is happening to the business of WRBIEL and it is being transferred to BIC, should let policyholders know of that fact, and if there is any desire to object, they can come along. In the other Segments, matters are a little more complicated, in particular due to commercial reality. As I said earlier, the coverholders and managing general agents in Segments B and D are likely to view the ultimate insureds, if I may use that expression, whom I am assuming are the affected policyholders, as their customers rather than as WRBIEL’s customers.
30 Therefore there is the likelihood, it seems to me, that in the documentation that surrounds the creation of these policies with WRBIEL, that emphasis will have been placed by the coverholder or managing general agent on its position, and not on WRBIEL’s position and identity. Therefore, merely to identify that WRBIEL is transferring business to BIC may mean very little, if anything, to someone who has a policy in fact with WRBIEL but which was arranged through a coverholder or managing general agent who has made as clear as it can, without misleading anyone, that it is the commercial counterparty, when in fact it may be the commercial counterparty but not the insurer.
31 This is less of a risk in relation to Segment C, but if the example of a nurse in a hospital in Tasmania is taken, he or she might want to know that WRBIEL is the insurer of the master policy of the Nurses Federation, and its simple identity will perhaps mean nothing to that nurse. It ought be, one would have thought, to the Nurses Federation's account of responsibilities to concern themselves with this, especially given the terms of the master policy which would make that industrial organisation the agent of those nurses. Nevertheless, I think that fairness and prudence dictates that there be something in this notice that makes it plain to people how it may be that they are affected by this.
32 These additions to the notice need not be long. Indeed, they should not be long, but there needs to be something in the notice which brings the kinds of matters to which I have referred to the attention of the underlying insureds, who are the affected policyholders on the assumption we are making, as well as the matter being made clear to the master policyholders. So I do not propose to make orders now, but I thought it appropriate to set out in these reasons why I am in all likelihood prepared to make orders substantially in accordance with the draft that has been handed to me, as long as I obtain satisfaction as to the matters I have identified and there is produced to me orders in a form which take account of the matters to which I have referred.