QBE Insurance (Australia) Ltd, in the matter of Division 3A of Part IIIA of the Insurance Act 1973 (Cth) & QBE Insurance (Australia) Ltd [2015] FCA 1223

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1225 of 2015

IN THE MATTER OF DIVISION 3A OF PART IIIA OF THE INSURANCE ACT 1973 (CTH) & QBE INSURANCE (AUSTRALIA) LTD QBE INSURANCE (AUSTRALIA) LTD ACN 003 191 035

JUDGE: ALLSOP CJ DATE: 5 November 2015 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 Before the Court is an originating application in the matter of Division 3A of Part III of the Insurance Act 1973 (Cth) (the Act) for the transfer of certain business from QBE Insurance (International) Limited (QBE International) to QBE Insurance (Australia) Limited (QBE Australia). There are two aspects to the application that can be seen as separate schemes, in effect: one concerns business that has previously been written in Norfolk Island or connected with Norfolk Island, the second deals with reinsurance business that had been written by QBE International. 2 The matter is before the Court today on an interlocutory application seeking orders, amongst other things, for a degree of dispensation for what is provided in s 17C of the Act. Under s 17C, various steps are laid down to be taken before the application for confirmation of the scheme by the Court. The broad structure, as set out in s 17B, is that no part of an insurance business of a general insurer may be transferred to another general insurer or amalgamated with the business of another general insurer, except under a scheme confirmed by this Court. 3 Section 17C deals with what has to be done by way of information distribution prior to a hearing for the confirmation of the scheme. That is best set out by setting out s 17C. 17C Steps to be taken before application for confirmation (1) In this section: "affected policyholder " means the holder of a policy affected by a scheme. "approved summary " means a summary approved by APRA. (2) 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 have been given to APRA in accordance with the prudential standards; and (b) notice of intention to make the application has been published by the applicant in accordance with the prudential standards; and (c) an approved summary of the scheme has been given to every affected policyholder. (3) Without limiting the provision that may be made by the prudential standards for the purposes of paragraph (2)(b), the notice referred to in that paragraph must include, in relation to each body corporate affected by the scheme, details of the place and time at which an affected policyholder may obtain a copy of the scheme. (4) An affected policyholder is entitled, on the person's request, to be provided by the company with one copy of the scheme free of charge. (5) The Federal Court may dispense with the need for compliance with paragraph (2)(c) in relation to a particular scheme 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. 4 What follows is broadly taken from the helpful submissions of Mr Owens, and is supported in the evidence by the affidavits of Jarrod Stefan Bayl affirmed 4 November 2015, Maurice Tarabay affirmed 4 November 2015, and Naomi-Claire Rout affirmed 30 October 2015. 5 QBE Australia is an Australian corporation and wholly-owned subsidiary of QBE Insurance Group Limited. QBE Australia is authorised under the Act to carry on insurance business in Australia and is a large general insurer. QBE International is also an Australian corporation and wholly-owned subsidiary of QBE Insurance Group Limited, and it is also authorised to carry on insurance business in this country. 6 QBE International originally played a role in the QBE group of companies to serve as an underwriter for business written outside Australia, originally in the Pacific but extending to South-East Asia. Notwithstanding the international character of the business, it was always intended that QBE International would be subject to the Australian insurance regulatory regime and the supervision of the Australian regulator, now the Australian Prudential Regulation Authority (APRA). 7 A decision has been made to reorganise the QBE group business. That is what these schemes are about. Thus, it is important to understand at the outset that this is not the transfer of insurance business to another distinct group, but is the internal reorganisation of the insurance business of the QBE group, to the extent that the scheme deals with it. 8 The first proposed scheme involves the transfer of business referred to as Norfolk Island Insurance Business, meaning all of the insurance business underwritten by QBE International where the insured risk is situated in Norfolk Island. The evidence discloses that such business is principally retail insurance comprising home and motor vehicle insurance, although there is a small amount of commercial insurance. That is referred to as the Norfolk Island Scheme. 9 The second proposed scheme involves the transfer of, in effect, the run-off or legacy reinsurance business originally written by QBE International, when trading as QBE Re Asia Pacific or Sydney Re, or by a company called Reinsurers Pty Limited, which was subsequently assumed by QBE International. This is the QBE Re Scheme. This is all old business. The writing of this reinsurance business by these entities ceased in 2003. 10 The present application which the Court is concerned with today seeks orders, in effect, pursuant to s 17C(5) of the Act, dispensing to a degree with the need for strict compliance with s 17C(2)(c) in relation to each scheme. Section 17C(2)(c) requires that an approved summary of the scheme be given to every affected policyholder. The Court has a discretion to dispense with the need for compliance, and it may do so in relation to a particular scheme, in accordance with subsection (5). 11 An "affected policyholder" has been dealt with in Re Insurance Australia Limited (2004) 139 FCR 450 at [19]-[20], and is a person holding a policy of insurance that is affected by the scheme. Not every holder of a policy issued by the insurer is a party to the scheme. 12 The evidence discloses that the dispensation sought today is more to be understood as identifying the totality of people who are the relevant policyholders, after due inquiry. And so, in a sense, it is not so much a dispensation as it is a drawing of the orders in accordance with what reasonable attempts have shown to be the persons who will be affected or who may be affected by the scheme. 13 At this point it is important to note that the APRA has been involved in overseeing all aspects of the two schemes. It has liaised and communicated with QBE in relation to all matters; it has made suggestions from time to time as to improvements in the process and substance of the schemes; and its clarifications have been incorporated by QBE. Mr Claxton appears before me today on behalf of the APRA to tell me those things and also to say that in the APRA's views the affidavit material is both accurate and reasonable upon which to make the orders sought. 14 The Norfolk Island Insurance business was written exclusively through insurance intermediaries who were the brokers or agents. All had authority or "QBE's pen", as it were, to write business. Until 2012, when Ms Rout began her work, QBE International relied upon the records of those intermediaries to understand the detail of its business in Norfolk Island. It kept what was called a red book, which had a brief précis of a policy number and basic information of that kind to identify business; but it did not keep a list of names of policyholders. 15 Since 2012, Ms Rout, as described in her affidavit, has sought to put together in the business records of QBE International a reliable list of policyholders as far as could be done. That is relevant because the structure of the orders in relation to the Norfolk Island Scheme is to send material to people who have been able to be identified since 2012 as policyholders. 16 The nature of the business that has been written in Norfolk Island and the analysis that has taken place of the claims history would indicate a tolerably short-tail business, although - and I do not say this critically - I am not sure that the matters identified in [57] of Mr Bayl's affidavit necessarily give a huge amount of comfort as to the lack of likelihood of motor vehicle claims on Norfolk Island. That said, the claims history indicates that the tail of the business from Norfolk Island is tolerably short, and it is unlikely that there are too many, if any, likely claimants under policies written earlier than 2012. 17 As to former policyholders, the evidence discloses in relation to Norfolk Island that there are two open claims and, secondly, that theoretically every policy ever written could be capable of having a claim, but that, as I have said, the claims history reveals the unlikelihood of that. 18 What is proposed in relation to the Norfolk Island Scheme is to send an approved summary of the scheme - which, under the guidelines, will be approved by the APRA - to all affected policyholders for whom an address can be found whose policies were issued on or after 1 January 2012. This includes those policyholders with open claims. And secondly, to send an approved summary of the scheme to each insurance intermediary through whom QBE International wrote business. There are five such intermediaries on the island. Most of the business is written through two of them. 19 Thus, in effect, the policyholders who are not proposed to be sent an approved summary are any policyholder, who may be affected, whose policy was written before January 2012; any affected policyholder for whom a current address is not known; and any affected policyholder who acquires a policy after today. The evidence of Ms Rout as to addresses satisfies me that QBE has done what it can to identify an appropriate list of insurers, and I note once again that the APRA is of the same view. It is proposed to provide scheme summaries to over 1000 policyholders to the addresses which were revealed in the process that Ms Rout's evidence discloses. 20 It can also be said that the community is a small tightly-knit community on a small island, and the likelihood of any policyholder not becoming aware of the scheme confirmation hearing is remote, assuming - as I am sure will be the case - that the orders are complied with. 21 In relation to the reinsurance scheme - the QBE Re Scheme - it is proposed to notify all persons that QBE is now able to identify as an affected policyholder, that is, as a reinsured in the past. As I said, the relevant reinsurance of these entities and businesses ceased in 2003. The initial mild surprise that one might exhibit when told that QBE may not be sure of identifying all insureds evaporates when one understands that the reinsurance has been written since 1950. 22 The evidence discloses the attempts that have been made to complete the database and list of reinsureds, taking out relevant entries that are either repetitive or misleading. And the process that has been undertaken, described in the evidence, in particular, of Mr Tarabay, is that there are contact details for over 1000 cedents and that ultimately a verified address for 94 per cent of the cedents has been identified. 23 It is unnecessary to deal with in any detail the cases dealing with the discretion under s17C(5): see generally AAI Limited, application under the Insurance Act 1973 (Cth) [2015] FCA 452 at [22] and Application of Gordian RunOff Limited under the Insurance Act 1973 (Cth) [2013] FCA 983 at [16] (and the cases discussed therein). I am satisfied that the Court should exercise its discretion to make the orders that are proposed. That is largely for the reasons put forward by Mr Owens in his submissions. 24 First, I am satisfied that the applicant has taken all reasonable steps to identify policyholders and those policyholders who may be affected by the scheme. 25 Secondly, the applicant will take the additional steps set out in the orders so that affected policyholders who may not be directly notified may still receive notice of the scheme. This will be done in relation to the Norfolk Island Scheme by sending a copy of the scheme to each of the brokers through whom QBE wrote the business, by publishing a notice in newspapers and publications circulating on Norfolk Island, by publishing a notice on a website dedicated to the Norfolk Island community, and publishing a notice on the QBE Asia Pacific website. I am satisfied of the same matters in relation to the QBE Re Scheme, because the applicant will send a copy of the scheme summary to the insurance regulator in each jurisdiction where QBE Insurance or its predecessors issued a reinsurance contract, and in which it has not been possible to identify contact details for an affected policyholder. It will also publish a notice in the Wall Street Journal Asia edition, and it will publish a notice on the QBE Asia Pacific and the QBE Singapore websites. 26 Thirdly, the proposed scheme as I said earlier is an intragroup scheme, and one is not faced with the complete change of identity, in a group sense, of who the insurer is. 27 Fourthly, the APRA is supportive of this immediate application, as I have said, and it has reviewed the scheme and associated applications, and the steps taken thus far. 28 For the above reasons the Court is prepared to exercise its power under section 17C(5) in making the orders as appearing below:

Norfolk Island Scheme

1. In relation to the proposed scheme for the transfer of the Norfolk Island insurance business of QBE Insurance (International) Limited (QII) to the Applicant (the Norfolk Island Scheme), the need for the Applicant to comply with s17C(2)(c) of the Insurance Act 1973 (Cth) (the Act), pursuant to s17C(5) of the Act, is dispensed with provided that the Applicant complies with orders 2, 3 and 4 below at least one day prior to the first day of the public inspection period required by the Australian Prudential Regulation Authority (APRA) Prudential Standard GPS 410.
2. The Applicant send a summary approved by the APRA in respect of the Norfolk Island Scheme (the Norfolk Island Scheme Summary), and in the letter sending the Norfolk Island Scheme Summary inform the recipient of the availability of the scheme summary on the website referred to in Order 4 below, by pre-paid post to the postal address on QII's files: (a) to every affected policyholder insured by QII in respect of a risk situated on Norfolk Island under a policy issued on or after 1 January 2012, for whom or for which QII has, after reasonable enquiry, been able to obtain a postal address; and (b) the office of each insurance broker through which QII transacts insurance business the subject of the Norfolk Island Scheme.
3. The Applicant cause a notice concerning the proposed Norfolk Island Scheme to be published: (a) in the Norfolk Island Government Gazette; (b) in the Norfolk Islander, a weekly newspaper that circulates on Norfolk Island; and (c) on Norfolk Online, a website that features content of particular relevance to residents of Norfolk Island at www.norfolkonlinenews.com.
4. The Applicant cause a copy of the Norfolk Island Scheme Summary to be made available via a link on the QBE Asia Pacific website maintained by the Applicant's corporate group until the date on which the Norfolk Island Scheme becomes effective. QBE Re Scheme
5. In relation to the proposed scheme for the transfer of the QBE Re and Sydney Re reinsurance business of QII to the Applicant (the QBE Re Scheme), the need for the Applicant to comply with s17C(2)(c) of the Act, pursuant to s17C(5) of the Act, is dispensed with provided that the Applicant complies with orders 6, 7 and 8 below at least one day prior to the first day of the public inspection period required by the APRA Prudential Standard GPS 410.
6. The Applicant send a summary approved by the APRA in respect of the QBE Re Scheme (the QBE Re Scheme Summary), and in the letter sending the QBE Re Scheme Summary inform the recipient of the availability of the scheme summary on the website referred to in Order 8 below, by pre-paid post to the postal address on QII's files: (a) except as set out in paragraph (b), to every affected policyholder reinsured by QII under a reinsurance contract: (i) underwritten by QII under the trading name QBE Re Asia Pacific; or (ii) assumed by QII and originally underwritten by Sydney Reinsurance Company Pty Limited or Reinsurers Pty Limited, for which QII has, after reasonable enquiry, been able to obtain a postal address; (b) to the national head office in each country in which more than one affected policyholder within the same corporate group was or is domiciled; and (c) to the government authority or agency responsible for regulating insurance business in each country where QII or its predecessor issued a reinsurance contract to an affected policyholder for which QII has, after reasonable enquiry, been unable to obtain a postal address.
7. The Applicant cause a notice concerning the proposed QBE Re Scheme to be published in the Wall Street Journal - Asia Edition, a daily newspaper circulating throughout Asia and elsewhere.
8. The Applicant cause a copy of the QBE Re Scheme Summary to be made available via a link on the QBE Asia Pacific website at www.qbeap.com and on the QBE Singapore website at www.qbe.com.sg maintained by the Applicant's corporate group until the date on which the QBE Re Scheme becomes effective I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Allsop.