Munich Reinsurance America Inc, in the matter of Munich Reinsurance America Inc [2010] FCA 948

REASONS FOR JUDGMENT 1 This proceeding concerns proposed schemes for the transfer of insurance business from Munich Reinsurance America Inc (MRAm) to related companies of MRAm. Two schemes are proposed, one relating to reinsurance business and one relating to direct insurance business. The proposed schemes involve the transfer of business to companies that are subsidiaries of MÜnchener RÜckversicherungs-Gesellschaft, which translates as Munich Reinsurance Company (Munich Re). MRAm is a subsidiary of Munich Reinsurance Company. Great Lakes Reinsurance UK PLC (Great Lakes) is also a subsidiary of Munich Reinsurance Company. 2 It is proposed that the reinsurance business will be transferred to the Australian branch of Munich Re and the direct insurance business will be transferred to the Australian branch of Great Lakes. The schemes are presently being considered by the Australian Prudential Regulation Authority (APRA). Assuming that APRA indicates that it has no objection to the schemes, the companies seek dispensation from compliance with certain of the provisions of the Insurance Act 1973 Cth (the Act). 3 Section 17B of the Act relevantly provides that no part of the insurance business of a general insurer may be transferred to another general insurer except under a scheme confirmed by the Federal Court. The scheme must set out the terms of the agreement or deed under which the proposed transfer is carried out and particulars of any other arrangements necessary to give effect to the scheme. 4 Section 17C(2) of the Act relevantly provides that an application for confirmation of a scheme may not be made unless: (a) a copy of the scheme and any actuarial report on which the scheme is based has been given to APRA, (b) notice of intention to make the application has been published by the applicant in accordance with prudential standards published by APRA and (c) an approved summary of the scheme has been given to every holder of a policy affected by the scheme. However, s 17C(5) provides that the Court may dispense with the need for compliance with the requirement that an approved summary of the scheme be given to every affected policyholder if it is satisfied that, because of the nature of the scheme or the circumstances attending its preparation, it is not necessary that the paragraph be complied with. 5 In relation to the scheme for the transfer of the direct insurance business the companies have considerable difficulty in identifying all persons who would be affected policyholders within the meaning of s 17C in relation to that scheme. The substantial application before me today is for dispensation of the requirement to comply with s 17C(2)(c). For more abundant caution it is also proposed to seek dispensation of that requirement in relation to the transfer of the reinsurance business. 6 In order to put the present application in context it is necessary to say something about the companies involved. Munich Holdings of Australasia Pty Limited (MHA) is a sister company to MRAm. The substantive application is by MRAm for confirmation of the scheme to transfer its direct insurance business to the Australian branch of Great Lakes and the scheme to transfer its reinsurance business to the Australian branch of Munich Re. Munich Re has been registered in Australia as a foreign corporation since 11 June 1956 and has been authorised to carry on insurance business in Australia under the Act through a local branch. Since being authorised under the Act, Munich Re has had a mandate from the Munich Re Group to write non-life insurance business in Australia. 7 Great Lakes is incorporated in the United Kingdom and is regulated as a general insurer by the United Kingdom Financial Services Authority. It is a wholly owned subsidiary within the Munich Re Group. Great Lakes is registered in Australia as a foreign corporation and has been authorised to carry on insurance business in Australia under the Act through a local branch since 31 October 2007. Great Lakes has a mandate from the Munich Re Group to write only non-life direct insurance business. 8 MRAm is incorporated in the United States and is also a wholly owned subsidiary within the Munich Re Group. MRAm is registered in Australia as a foreign corporation and has been authorised to carry on insurance business in Australia through a local branch operation since December 1970. 9 MHA is also incorporated in Australia and is a wholly owned subsidiary within the Munich Re Group. MHA is the employer of all Australian staff of the Munich Re Group and is also the agent in Australia for both Munich Re and MRAm. 10 MRAm began writing direct insurance business in Australia in the late 1990s. Its business went into run-off in July 2002 with a limited exemption to write only direct insurance up until February 2003. Prior to commencing run-off, MRAm wrote a variety of traditional reinsurance business in Australia. Its reinsurance business was conducted directly with insurance companies and was administered through MRAm itself. All of MRAm's Australian reinsurance business conducted since the establishment of APRA in 1998 has been conducted with APRA regulated insurers. 11 Between 1993 and commencing run-off, MRAm wrote a variety of direct insurance business in Australia. Between 1993 and 2000, the business written was predominantly long-term business, including a significant proportion of professional liability business such as medical, legal and architects' professional indemnity. The term short-tail business is used to refer to the expectation that there is little likelihood of any claim arising either because policies have expired or time limits within which to bring a claim have passed. 12 The Munich Re Group describes its direct insurance business as program business, being insurance business written for specific types of risks. The underwriting, claims handling and administrative functions of the program business were outsourced to managing general agents (General agents). Between 2000 and the commencement of run-off, a mix of professional liability and public liability business was continued to be written. Under the arrangements between MRAm and the General agents, the General agents had delegated authority to administer the business and were responsible for all of the administration associated with such business, including maintaining policyholder lists and address details. In view of those arrangements, MRAm did not establish systems for the recording and maintaining of comprehensive lists of policyholders. 13 MRAm also wrote a small proportion of reinsurance business that included both Australian and New Zealand risks. The New Zealand risks have always been treated by MRAm as New Zealand business and included in its regulatory returns. That business is to be transferred to the New Zealand branch of Munich Re by way of a scheme in respect of which approval will be sought from the High Court of New Zealand. There may be an argument that the liabilities of that business may be liabilities of the Australian business. Accordingly, MRAm intends to provide a copy of the proposed reinsurance scheme summary to all such New Zealand policyholders and to include those policies in the reinsurance scheme. 14 The proposed schemes are part of an intricate restructure by the Munich Re Group to rationalise the number of business entities that are operating and regulated in Australia in order to improve capital efficiency and support for the Australian operations. The estimated value of the liabilities of the insurance and reinsurance business to be transferred is approximately $60,000,000, consisting of approximately $26,000,000 for the direct insurance business, and approximately $34,000,000, for the reinsurance business. The proposed schemes will not involve any change in the terms or conditions of the policies being transferred, other than the name of the insurer or reinsurer. 15 In connection with the proposed schemes, MHA staff have reviewed MRAm records and computer systems with respect to the insurance business. As a result of that review, MHA has been able to compile a list of 142 policyholders and their current address details for the Australian reinsurance business written by MRAm. There is good ground for concluding that the list is a complete list of persons reinsured by MRAm. However, because MRAm has been conducting reinsurance business in Australia since 1970, it is possible that there may be records that are lost or incomplete, such that there are reinsurance policyholders who may not have been identified in the course of the review. 16 The position in relation to direct insurance policies is more complex. MHA staff have compiled a list of contact details for all policyholders with open claims for MRAm's direct insurance business in Australia. There are 33 such policyholders. 17 All of MRAm's Australian direct insurance business was conducted through the General agents. MRAm does not hold individual policyholder details for those policies and has not implemented or maintained a system for the recording of such details except to the extent that such policies have open claims. Accordingly, MHA staff made attempts to contact each of the relevant General agents to obtain policyholder details for the purposes of compiling a list of affected policyholders in relation to the direct insurance scheme. For those General agents with which a business relationship still exists, MHA staff have contacted each of them and sought details of policyholders. In respect of other General agents with which MRAm has no current business relationship, instructions were given to MRAm's solicitors to contact each General agent to seek details of policyholders. The results of the inquiries are varied. Having regard to the small proportion of policyholders that have been identified, it is appropriate to say something more about the General agents. 18 MRAm wrote professional indemnity cover for Lawcover Pty Limited (Lawcover) in 2001 and 2002 under an agreement dated 1 July 2001. That business is considered long-tail business and still has outstanding loss reserves. Approximately 4000 policies were written in each year. Lawcover has supplied a list of policies and contact details in respect of the policyholders for the policies issued in 2001 and 2002. 19 MRAm and Sportscover Australia Pty Limited (Sportscover) entered into an agreement on 26 November 1998. Between 1999 and 2002, Sportscover issued an estimated 10,000 policies on behalf of MRAm covering general liability, personal accident and property insurance to sports clubs and organisations. That business is considered to be a mix of long and short-tail business and still has outstanding loss reserves. No new claims have been lodged since 2007. Sportscover has supplied a list of policies that it considers were issued under its agreement with MRAm. 20 MRAm and Triton Underwriting Insurance Agency Pty Limited (Triton) entered into an agreement on 1 January 1999. Between 1999 and 2003, Triton issued an estimated 130,000 policies on behalf of MRAm covering general liability, personal accident and property cover for events, leisure, amusements, the childcare industry and special risks. That business is considered to be a mix of long and short-tail business and still has outstanding loss reserves. Triton first supplied a list of policyholders which had over 130,000 policies but no address details. A second report was subsequently provided containing more information, although it still failed to disclose around half of those policyholders' addresses. 21 MRAm and Direct Underwriting Agency Pty Ltd (Direct Underwriting) entered into an agreement on 22 June 1998. Between 1998 and 2002, Direct Underwriting issued an estimated 2,000 policies covering general liability and large commercial motor vehicle cover. That business is considered to be a mix of long and short-tail business but has no outstanding loss reserves. No claims have been reported since 2007. The solicitors wrote to the successor of Direct Underwriting, and ascertained some information from the successor. 22 In relation to other General agents, being Affinity Risk Partners (Brokers) Limited, with whom an agreement was made on 1 June 2002, Facility Mutual Underwriting Pty Ltd, with whom an agreement was made on 12 June 2001 and Heritage Motor Vehicle Insurance Company Pty Ltd, with whom an agreement was made on 13 September 1999, no response was received to letters seeking information. IC Firth & Associates, with whom MRAm entered into an agreement on 22 December 1999, indicated that no relevant data could be located. 23 As a result of the inquiries that I have briefly summarised, MHA has not been able to obtain complete contact details for many policyholders with respect to the direct insurance business. Accordingly, on or about 23 July 2010, MHA engaged the services of The Data Company, which specialises in data management for businesses, including data validation, data merging and data washing, to review the policyholder data that had been received from the General agents. The Data Company conducted a verification exercise and provided MHA with a verified list of some further policyholder names and addresses. 24 Following that verification exercise, MHA has been able to identify only some current address details for a number of policyholders. Overall, the number of policyholders for whom confirmed details are available is less than 10% of the total. The reasons why addresses could not be confirmed include the fact of the poor quality of the data that had been provided by the General agents and the age of that data. 25 Mr Andrew Priest, who is an investment administration and project consultant with MHA and who arranged the inquiries to which I have referred, is not aware of any further searches that could be reasonably undertaken in order to ascertain additional policyholder contact details. The only possible search that could be undertaken by MHA would be to retrieve and search through old archive boxes of paper records relating to the business. Mr Priest does not consider that that would be worthwhile in the circumstances because, having regard to the age of the business, any policyholder details that might be located are unlikely to be current. 26 On 30 April 2010, MRAm wrote to APRA outlining the steps that had been taken up to that date to attempt to obtain contact details for all policyholders and seeking APRA's support for an application to the Court for orders dispensing with strict compliance with the requirements of s 17C(2)(c). By letter of 4 May 2010, APRA informed MHA that it would support an application to the Court for dispensation with compliance with all of those requirements. 27 The two schemes are relatively straightforward in their operation. They are substantially the same in their terms. The operative provision of each is clause 2, by which, on the effective date, MRAm will transfer the relevant business and, in particular, the relevant insurance contracts or reinsurance contracts, insurance liabilities and business assets, such transfers to include all right, title, interest, benefit and powers that have arisen, or may in the future arise, and any liabilities that have, or may in the future arise in respect of insurance contracts or reinsurance contracts, as the case may be, insurance liabilities or business assets. The terms insurance contracts and reinsurance contracts are defined by reference to the respective businesses being transferred. The excluded liabilities in relation to one scheme are the liabilities in respect of business which is the subject of the other scheme. Clause 3 provides for the consideration to be paid for the transfer of the business. Under the reinsurance scheme, the consideration to be paid by MRAm is $33,050,000. In the case of the direct insurance scheme, the consideration is $26,900,000. 28 A provisional report has been provided in respect of each of the schemes by Mr Kaiser Stefan, the appointed actuary of Great Lakes and Munich Re. In relation to the direct insurance business, Mr Stefan, in his report of 16 July 2010, says that he is satisfied that the interests of the affected policyholders will remain adequately protected under the proposed scheme. He is satisfied that Great Lakes will continue to meet the requirements under the Act and its solvency targets as stipulated in its relevant capital management plan. Great Lakes has in place reinsurance arrangements that will also protect the risks to be transferred from MRAm. 29 In relation to the reinsurance scheme, Mr Stefan said in his report of 12 July 2010, that he is satisfied that the interest of the affected policyholders will remain adequately protected under the proposed scheme. He is also satisfied that Munich Re will continue to meet the relevant requirements under the Act and its solvency targets as stipulated in its relevant capital management plan. He observed that the scheme ensures that the policy terms and conditions will remain unchanged. 30 The requirements of s 17C are of considerable importance, and dispensation under s 17C(5) is not given as a matter of course. However, the Court can take some comfort from the fact that APRA has been informed of the application and does not oppose the making of the orders now sought. The need for dispensation arises principally because MRAm is unable to identify all of its policyholders and their current address details, despite the inquiries to which I have referred, and the further steps that it has taken. As I have said, the inability to identify information arises because of the fact that MRAm has been in run off since 2002, and the fact that the direct insurance business was arranged and administered by General agents. 31 MRAm seeks dispensation with respect to those policyholders for whom it does not have verified name contact details, notwithstanding the inquiries to which I have referred. It is proposed that the approved scheme summary will be sent to all policyholders with open claims, all policyholders of MRAm for whom MRAm has been able to obtain and verify address details, each General agent or broker identified by Mr Priest, the details of which I have briefly described, and any policyholder who makes a claim up to the day before the application for confirmation is heard. MRAm will also cause a copy of the relevant scheme documents to be made available by way of a link on its Australian website or the Australian website of Great Lakes. 32 For the following reasons, I consider that it is appropriate to accede to the request for dispensation. First, I am satisfied that MRAm has acted diligently to determine the identity and current addresses of affected policyholders. Secondly, the proposed additional steps give some comfort that the scheme will come to the notice of any affected policyholder who is not directly notified. Thirdly, the scheme is an intra group scheme, in that the policies are being transferred from one subsidiary to another within the Munich Re group. Related to that circumstance is the provisional report from the appointed actuary of Great Lakes, Mr Stefan, in the terms to which I have referred. 33 Having regard to the nature of the business in question, it is reasonable to conclude that affected policyholders whose identities or current addresses cannot be identified are less likely to be prejudiced by not being notified of the scheme by means of an approved scheme summary. Further, as I have said, MRAm's direct insurance business has been in run off since 2003, and all issued policies have expired. Thus, for many of the unidentified policyholders, particularly those who hold policies that are considered short tail, the chance of being affected by the scheme in reality, as distinct from in theory, is relatively low. So far as long tail policies are concerned, the potential for new claims diminishes as time passes. 34 In relation to policies issued by both Sportscover and Insurance Advisers Net, no new claims have been lodged since 2007. Of the General agents from whom MRAm received no response, most arranged short tail business in respect of which a claim being made and notified is now unlikely. Affinity Risk Partners is an exception, insofar as it arranged both long and short tail business. However, no claims have been reported in relation to those policies since 2002. Finally, as I have said, APRA has appeared on the hearing of this application and does not wish to say anything in opposition to the making of the order for dispensation. 35 In relation to the reinsurance scheme, the application is for more abundant caution, lest there is some defect in the records. I consider it is appropriate to accede to the application. A full review has been undertaken of MRAm's records and computer system to identify affected policyholders, and MRAm proposes to take the additional step of identifying and providing an approved summary of the scheme to each insurer authorised under the Act to carry on insurance business. All business that is to be transferred under the reinsurance scheme was conducted with APRA regulated insurers, and all affected policyholders are likely to be provided, therefore, with a summary of the scheme. Further, MRAm's reinsurance business has now been in run off for eight years. In the light of Mr Stefan's report, the policyholders will be adequately protected under the scheme, and the fact that the scheme is intra group without any real change in risk is of significance. 36 For those reasons, I propose to make orders as sought in the notice of motion filed on 11 August 2010. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (4 paragraphs)

Legislation Cited (1)

Cited By (1)