Buying and selling insurance books is an important way for insurers and brokers to grow, but there are several important points and regulations we need to keep in mind when we embark on a negotiation to purchase a book.
The important principles are that no one owns human beings, and they are free to decide how they respond to any deals but, when it comes to insurers buying books of business from other insurers, one needs to understand the various means of going about such a purchase.
Going about such a purchase
The first way an insurer purchases policies from another insurer is in terms of Section 50 (and potentially Section 51) of the Insurance Act. An in-principal approval needs to be sought from the Prudential Authority (PA). The application requires the selling insurer to communicate with all its policyholders intended to be sold to advise them a contract of sale has been agreed upon and provide information to the policyholders to enable an informed decision to either be part of the process or cancel their policies and seek alternative insurance elsewhere. This communication is put to the PA by way of a formal and detailed communication plan, compliance with which will be audited at the end of the process.
The policyholder may also request further clarity on the deal from the selling insurer or object to the deal itself either with the PA or the selling insurer. There also needs to be an actuarial report submitted to the PA from both the selling and acquiring insurers to certify the transaction will not adversely affect either insurer from a solvency point of view.
Being fair to the on-coming policies
Formal adverts are placed in national and local newspapers to ensure all reasonable measures are taken to bring the proposed sale to the attention of all policyholders. The acquiring insurer will also need to make sure they are being fair to the on-coming policies and offer them like-for-like cover that they enjoyed with the previous insurer for a period of time.
Frequently asked questions guides are put together for all queries that the on-coming policyholders need to be answered. One needs to also take note of competition law and if the two firms are competitors, the contract of sale cannot contain comprehensive restraints outside of the policies being purchased. Competitors cannot divide markets or agree not to compete against each other. If the purchase exceeds the stated thresholds in the Competition Act, the “merger” will need to be submitted to the Competition Commission for ratification.
It’s not a simple process
Again, I want to stress that the policyholder cannot be forced to move to the new insurer and they always have the right to cancel their policy and move to an alternative insurer, regardless of the contract of sale between insurers and the payment structure. If the parties do not wish to make use of Section 50 and incur the cost of the communication plan, advertising, audit and actuarial signoffs, as well as delay the process for the time it takes for the PA to authorise the process, the clients can always be re-broked from insurer A to insurer B. This would require the broker obtaining express consent from the policyholder to cancel their policy with insurer A and re-incept the policy with insurer B. The claims cannot move, however, and the policy is simply moved with effect from the date the new policy incepts. The old insurer would still be liable for all existing claims. New debit orders would have to be signed.
As we can see, it’s not a simple process for an insurer to purchase a book of business from an existing insurer – it is not simply conducting a contract of sale and agreeing on the purchase price. There are regulatory and fairness obligations that need to be met and these considerations need to be built into the purchase price and projected time frames.
Danny Joffe