GIM4220 | Taxation of general insurance: transfers of business: general

Generally, one of the parties to a contract cannot transfer his contractual liabilities to a third person, as the counterparty creditor naturally has an interest in the standing of the holder of the liabilities. With the consent of the other contracting party or parties the contract may be novated (or in Scotland delegated), that is to say the old contract is discharged and a new one entered into with the new creditor. Application of this rule to insurers would make it very difficult for one insurance company to sell or transfer its business to another, since it will have liabilities to a large number of policy holders. It will seldom be practicable to obtain the consent of all the policyholders to the change. To meet this problem, Part 7 of the Financial Services and Markets Act 2000 (FSMA 2000) (replacing Schedule 2C to the Insurance Companies Act 1982) provides a mechanism by which a company that is subject to FSA supervision may obtain approval from the appropriate court (High Court or Court of Session) for an insurance business transfer. If the court agrees, the business (liabilities and assets) are transferred by operation of law by order of the court. The affected creditors, including the policyholders, have the right to object to the transfer.

The detailed machinery is set out in Part 7 of FSMA 2000 (sections 105 to 116 and Schedule 12), SI2001/3625 (The Financial Services and Markets Act 2000 (Control of Business Transfers) (Requirements on Applicants) Regulations 2001), and SUP18 of the Supervision sourcebook of the FSA Handbook. The FSA will consult with other regulators where necessary. The main changes made by FSMA 2000 compared with the Schedule 2C procedure are that a transfer of general insurance requires court sanction (as a life business transfer had always done) and an independent actuary’s report is required. But there are some cases (mainly reinsurance) where a company is not required to obtain consent to a transfer, but may do so if it wishes.