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18 December 2012
The October 2012 Court of First Instance decision in Re AXA (Hong Kong) Life Insurance Co Ltd(1) has clarified the role that the court plays in a proposed transfer of insurance business from one insurer to another. It discussed the factors that the court will take into account before approving such type of schemes. The fundamental question for the court to consider is whether the scheme as a whole is fair as between the interests of the different classes of person affected, not whether it represents the best possible option for policyholders.
The case concerned AXA China Region Limited's (AXACR) plan to transfer the insurance business of one of its wholly owned subsidiaries to another. By way of a joint petition under Section 24 of the Insurance Companies Ordinance (Cap 41), AXA (Hong Kong) Life Insurance Company Limited (AXAHKL) and AXA China Region Insurance Company (Bermuda) Limited (AXACRIB) sought the court's approval of a scheme for the transfer of the whole of AXAHKL's long-term business to AXACRIB. Under the ordinance, 'long-term business' includes insurance policies under the following categories:
The rationale behind the scheme was to improve the capital and administrative efficiency of AXACR's life insurance business in Hong Kong.
Under the scheme, AXACRIB would become the insurer of the 98,634 transferred policies in place of AXAHKL. The terms and conditions and the rights of policyholders under the transferred policies would remain unchanged. The only difference would be that such rights would be enforceable against AXACRIB instead of AXAHKL in the future. In common with similar schemes that the court has considered, the scheme did not provide for current policyholders of AXAHKL to be entitled to opt out of the transfer or to seek a return of premium or other compensation.
In compliance with the ordinance, the parties submitted a report by an independent actuary in support of their application and served notices on the affected policyholders. The court also heard from a few individual policyholders on the grounds of their objection to the scheme.
In considering whether to approve the scheme, the court followed the principles set out in Re Winterthur Life,(2) which in turn adopted the principles laid down in the UK authority Re London Life Association Ltd.(3) The principles can be summarised as follows:
Both the independent actuary and the Insurance Authority put forward evidence in support of the petition. The actuary stated in his report that the scheme would have no adverse effect on the reasonable benefit expectations of the transferring policyholders or of the existing policyholders of AXACRIB. The report also indicated that the scheme would enable the policyholders to benefit from having a larger pool of assets to call on under adverse scenarios. The Insurance Authority made it clear to the court that it saw no reason to object to the scheme.
On the other hand, the individual policyholders complained, among other things, that it would be unfair for the court to allow the scheme to proceed without the prior consent of the affected policyholders. They also argued that the scheme was unfair to the policyholders due to the absence of a provision permitting them to opt out of it.
The court pointed out that the ordinance provides a mechanism for the transfer of long-term business by means of a scheme such as that proposed by the parties in this case, notwithstanding that policyholders' consent was not forthcoming. The failure to obtain such consent therefore could not be a basis for the court to refuse to approve the scheme. It also rejected the complaint that the absence of an opt-out provision for policyholders rendered the scheme unfair.
The court stated that its role was to protect policyholders' interests by carefully scrutinising the scheme, which it would not approve if it was unfair or inimical to their interests. But it added that its function did not go so far as to ensure that the scheme was the best possible option that could be devised for its policyholders.
In response to the contention that the ordinance did not provide adequate protection for policyholders in a proposed transfer of long-term business, the court stated that the matter could be dealt with only by the legislature.
In light of the evidence from the actuary and the Insurance Authority, the court said that it was satisfied that the scheme was both well intentioned and commercially justified. It therefore exercised its discretion by approving the scheme.
The court made it clear in its decision that in approving a scheme for a transfer of long-term insurance business, its focus is on the contractual rights and reasonable benefits expectations of the policyholders, as well as the overall fairness of the scheme in relation to the policyholders and other affected groups. It must be convinced that the scheme has been put forward for sound commercial reasons and in good faith before the parties proposing the scheme are given the green light.
It is not the court's duty to ensure that the scheme is devised in such a way as to render it the best possible outcome for the policyholders, as this is a matter that should be left to the commercial judgement of the directors of the companies concerned. Complaints and grievances from individual policyholders will be taken into account by the court only if they reflect on the overall fairness of the affected groups.
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