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Chapter 15. Portfolio Transfer (Considerations when valuing the…
Chapter 15. Portfolio Transfer
Reasons:
Small proportion of business, but high resource cost
Purchased through an acquisition as part of the other business, but not the target we wanted
Loss making or not profitable enough - due to poor historic experience, change in market
Company has become insolvent and has to cease writing business
Don't be too dogmatic with definitions, as they can be combinations or used differently in the circumstance - always define the way you mean it
Considerations when valuing the Liabilities:
Negotiating strength
Initiator of the deal
Risk appetite
Uncertainty, tail length, etc.
Views of Regulators
Recommendations of oversight bodies (FSB, experts, etc)
Opinions of Reinsurers
Admin costs or savings
Impact on investment returns
Run-off to Exhaustion:
Cease to write new business, but keep responsibility
Must maintain business and admin functions
Mgmt time and capital can become disproportionate
One solution is to outsource the admin functions
Still responsible for all claims and costs
Normally a short-term solution until a better exit strategy is found
Reinsurance:
Still ultimately liable for claims
Need to consider level of risk transfer (deductibles, limits, etc.)
Default or insolvency risk of Reinsurer
Cost and Availability depends on the market
Level of ongoing involvement can vary - can still have lots of admin, costly
Scheme for Transfer of Insurance Business (Substitution):
Complete Risk transfer
Obtain consent from each policyholder (or intermediary if they have a mandate from the policyholder)
Must follow steps set out in the guidelines of the Short-term Insurance Act (Part V Transfer)
Registrar can decide on behalf of policyholders if 100% not obtained
A payment is negotiated and agreed
Must consider financial strength of both insurers and level of service
Reasons for Part V Transfer:
Achieves Finality - no exposure to business
Cost saving and capital release - more profitable use of funds
In Mergers and Acquisitions -
Pre acquisition into similar portfolios, or out of the company to sell the rest of the business
Post acquisition by combining subsidiaries
Another way of purchasing a portfolio without buying the hole company
Parties Involved:
Transferor Co.
Transferee Co.
Policyholders
Auditors
Actuaries
FSB
Experts FSB feels necessary
Sale of Business:
Sell the whole company - a drastic measure, and not only getting rid of the portfolio (then need Part V)
Sell some assets (like reinsurance asset where recoveries are uncertain). Must adhere to STIA
Registrar Approval Filing
Who requested the transfer and the effective dates of the transfer
Who the affected policyholders are
What the policy conditions are and the details of any differences
Agree that policyholders have been given information in order to make an informed decision
Agree that policyholder consent have been or will be sought
Interim arrangements with respect to benefits while transfer is being completed
List of assets and their fair value to be transferred
Auditor certificate