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. With the consent of the other contracting party or parties the contract may be novated, 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, some of which are likely to subsist for a long time. It will seldom be practicable to obtain the consent of all the policyholders to the change. To meet this problem, Part 7 FSMA (previously Schedule 2C to the Insurance Companies Act 1982) provides a mechanism by which a company that is subject to FSA supervision may obtain approval for an insurance business transfer. If it obtains it the liabilities (and the 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 sections 105 to 116 and Schedule 12 (Part 7) FSMA 2000, SI2001/3625 (The Financial Services and Markets Act 2000 (Control of Business Transfers) (Requirements on Applicants) Regulations 2001), and SUP 18 of the Supervision Sourcebook of the FSA Handbook. The FSA will consult with other regulators where necessary. The terms of any previous Schedule 2C transfers are continued by SI2001/3639. The main changes made by FSMA compared with the Schedule 2C procedure are that a transfer of general insurance now requires Court sanction (as a life business transfer has 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 it may do if it wishes.