ALLSOP CJ:
1 This is an interlocutory application made by the Australian Branch of Swiss Reinsurance Company Ltd (SRAU) in proceedings for orders under Division 3A of Part III of the Insurance Act 1973 (Cth) (Insurance Act). The originating application is for the confirmation of a proposed scheme for the transfer of all of the general reinsurance and insurance business of SRAU to the Australian Branch of Swiss Re Asia Pte Ltd (SRALAU) as part of the internal reorganisation of the Australian operations of the international insurance group, Swiss Re Group (the Scheme).
2 Under s 17B(1)(a) of the Insurance Act, 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. Section 17C of the Insurance Act requires that certain steps be taken before an application for the confirmation of a scheme is made. SRAU, by its interlocutory application filed on 14 August 2019 seeks an order under s 17C(5) that the requirement to comply strictly with one of those steps, that specified in s 17C(2)(c), be dispensed with, provided that it take various other steps specified within accompanying orders.
3 Section 17C of the Insurance Act is in the following terms:
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 The purpose of this provision is to ensure that persons who may be affected by the proposed transfer in respect of which confirmation is sought are given notice of the scheme and thus an opportunity to make submissions to the Court in respect of the scheme, if they so desire. For that reason, s 17(2)(c) requires an approved summary of the scheme to have been given to every 'affected policyholder'.
5 SRAU submits that it is not reasonably practicable to comply strictly with s 17C(2)(c), that is to provide a copy of this summary to every affected policyholder, in circumstances where it has written risks since the mid-1950s. Instead, SRAU proposes to ensure that, to the greatest extent possible, all affected policyholders will become aware of, or otherwise receive notice of, the Scheme by undertaking the following measures:
(a) providing copies of a summary of the scheme, to be approved by the Australian Prudential Regulation Authority (APRA) in the forthcoming weeks (the Approved Summary), to:
(i) all policyholders listed in a defined Policyholder Register;
(ii) all brokers that act on behalf of identified policyholders; and
(iii) new policyholders for whom a policy is written between the time at which existing policyholders are identified and the effective date of the Scheme.
(b) publishing a Notice of Intention to make the application, as approved by APRA (the Approved Notice), in the following national and international newspapers and online publications:
(i) The Government Gazette;
(ii) The Australian, being a newspaper circulating in each State and Territory in which an affected policyholder resides;
(iii) The Australian Financial Review;
(iv) The New Zealand Herald, being a newspaper circulating in New Zealand; and
(v) The Insurer, a global insurance trade magazine;
(c) making available links to copies of the Scheme, Approved Summary, Approved Notice and actuarial report prepared in relation to the scheme on SRAU's regional 'Australia & New Zealand' website from before the start of the period for public inspection (as specified in (f) below) to the date of hearing by the Court for confirmation of the Scheme;
(d) making available the documents listed in (e) above for public inspection from 9:00am to 5:00pm (local time) every day (except weekends and public holiday), for a period of at least 15 days (inclusive) at locations approved by APRA in each State and Territory in which an affected policyholder resides and provide copies of such documents on request to any affected policyholder free of charge; and
(e) providing a copy of the Approved Summary by post to each of the APRA-authorised general insurers listed on APRA's Register of General Insurers authorised to conduct new, renewal or run-off insurance business that has not been identified as an affected policyholder.
6 The issue that arises for determination is whether the Court should exercise its discretion under s 17C(5) to grant the dispensation orders sought by SRAU. The Court may do so if it is satisfied that, because of the nature of the Scheme or the circumstances attending its preparation, it is not necessary for SRAU to comply with s 17C(2)(c).
7 The substantive evidence in support of the application is in the form of two affidavits affirmed by Mr Andrew John Davidson on 14 August 2019 (the first affidavit) and 16 August 2019 (the second affidavit) respectively, and the oral evidence of Mr Davidson given at the interlocutory hearing on 22 August 2019. Mr Davidson has been a Senior Client Manager Australia and New Zealand at SRAU since October 2005. Mr Davidson's position can be described as client-facing and his general responsibilities include the development of SRAU's global reinsurance proposition for certain clients, client-management, dealing with transactions, negotiating contracts, marketing and brand promotion. Of particular relevance is that Mr Davidson was, and remains, responsible for supervising the process of compiling the register of policyholders for the purposes of the Scheme (the Policyholder Register).
8 The central aspect of the dispensation sought by SRAU is that only those policyholders classified as "active risks" need to be provided with an Approved Summary of the Scheme. SRAU maintains, as a matter of internal policy, a list of "active risks" which constitute the Active Business of SRAU. The term "active risks" is described in the first affidavit as the risks recorded in the Swiss Re Standard Insurance Computer System (SICS):
(a) with either an existing unexpired insurance coverage period;
(b) in run-off (that is, the policy has expired but there is a continuing expectation of future activity on the policy);
(c) with an expired coverage period where SRAU continues to receive a statement of accounts, claim settlements, loss reserve updates or claims notifications; and
(d) that have expired within the two year period prior to 31 May 2019, regardless of whether there has been any activity during that period,
and in respect of which SRAU has or may have an obligation to pay claims as and when reported.
9 The Policyholder Register compiled by SRAU only includes policyholders classified by SRAU as "active risks".
10 It is important to understand the structure and nature of SRAU's business, as described in the first affidavit, in order to assess whether the circumstances attending the preparation of the Scheme, including by limiting the relevant policyholders to those with "active risks", are such that dispensation orders for the need to comply with s 17C(2)(c) may be granted.
11 SRAU's business is primarily comprised of reinsurance contracts in the form of non-life reinsurance treaties (referred to as its Treaty Business) and non-life facultative risks (referred to as its Facultative Business) placed with policyholders either on a direct or intermediated basis and which comprise both long-tail and short-tail classes of risks. Long-tail classes are product lines for which specific losses may not be known for some period and claims can take a significant time to report and settle or close. Short-tail classes are product lines where claims are usually made during the term of the policy or shortly after the policy has expired. SRAU has also underwritten a small number of insurance contracts since 1956 (referred to as its Direct Insurance Business). These three business segments were identified as the relevant sources for the purpose of compiling the Policyholder Register.
12 The reinsurance contracts underwritten through the Treaty Business and the Facultative Business are recorded on a computerised management database called the Business Allocation Tool (BAT), which sources information from several different systems used across the Swiss Re Group, including SICS, to record policy, reinsurance accounting and claims information. SRAU also uses the Financial Reinsurance Contract System (FINCO), a standalone record-keeping system for non-life financial structured deals and transactions, prospective solutions, retrospective/run-off solutions and risk transfer, as well as the Reinsurance Client Home system (RICH), which holds contact information for policyholders and intermediaries.
13 In preparation for the creation of the Policyholder Register to be used for the purposes of the Scheme, an Active Business List was compiled using BAT and FINCO, the only repositories where SRAU's Active Business details are stored. Client information was then extracted from the RICH system and cross-referenced against the Active Business List to check the availability of contact information by policyholder, each of which had a unique reference identifier in the system, and intermediary, where applicable.
14 An updated Active Business List was then compiled and organised by policyholder. At that stage it became apparent that the contact details of 24 policyholders had not been identified. The contact details for these 24 policyholders were able to be extracted from a system equivalent to RICH used by a different division of Swiss Re Group. From 19 July 2019 to 14 August 2019, Mr Davidson, in consultation with Clement Mascarenhas and an employee of SRAU, continuously reviewed the Updated Active Business List. Throughout that process:
(a) duplicated entries were identified and de-duplicated;
(b) the small number of direct insurance policyholders were discovered and included in the List (believed at the time to be in the number of 18 policyholders with 19 policies);
(c) 2 policyholders inadvertently removed from the List were identified and re-included;
(d) 2 policyholders inadvertently excluded were included on the List; and
(e) 1 new policyholder was manually entered into the List.
15 As at 14 August 2019, 96 Active Business policyholders holding 2,055 policies across the Treaty Business, Facultative Business and Direct Insurance Business segments were identified and appear in the final version of the Policyholder Register annexed to the first affidavit.
16 As Mr Davidson deposes in the second affidavit, two further errors were then discovered.
17 First, on 14 August 2019 at 5:00pm, Mr Davidson identified that Swiss Re International SE Australia Branch (SRI), an APRA-authorised general insurer and Swiss Re Group's direct insurance carrier in Australia, had been erroneously omitted from the Policyholder Register, despite being a holder of a reinsurance policy issued to it by SRAU, classified by SRAU as Active Business and recorded in the Updated Active Business List. On the same day, Mr Davidson prepared an Updated Policyholder Register to include SRI.
18 Secondly, on 15 August 2019, upon further review of the Direct Insurance Business segment, Mr Davidson discovered that there were 13, as opposed to 18, direct insurance policyholders holding 19 policies. Of those 13 policyholders, only one is a policyholder with an active claim which falls within the definition of Active Business and which formed part of the Updated Active Business List and the Updated Policyholder Register. It is unclear on the available evidence whether any and, if so, how many of these policies are short-tail business and how many are long-tail business.
19 Mr Davidson deposes that he has calculated and believes that the Updated Policyholder Register as annexed to the second affidavit records the complete addresses of the 97 policyholders holding 2,055 policies identified by SRAU as representing all Active Business in relation to the Facultative Business, Treaty Business and Direct Insurance Business segments of SRAU.
20 At the hearing of the interlocutory application, I raised with Mr Owens, counsel for SRAU, my concern as to whether the two errors referred to above in the second affidavit cast any doubt on the completeness and accuracy of the process adopted by SRAU to identify the relevant policyholders to whom notification is to be provided, and particularly whether the discovered errors reveal any systemic fault in that process. Mr Davidson was then called to give oral evidence to address these concerns.
21 Mr Davidson explained that, during the preparation of the Active Business List, SRI had been mistakenly removed along with other Swiss Re entities because the focus was on contacting the policyholders outside of Swiss Re; that the process undertaken in relation to Swiss Re entities was not capable of affecting any external policy holder; and that the transaction relating to SRI was 'specific and rare' and therefore warranted re-inclusion on the Updated Active Business List.
22 The following exchange then took place between Mr Owens and Mr Davidson:
Mr Owens: I see. To your knowledge and relying on your familiarity with the company's computer systems, are there any further steps that could be taken to identify an active policyholder other than those that have been taken?
Mr Davidson: I don't believe so.
23 On the basis of the material before me, I am satisfied that Mr Davidson has a close knowledge of the relevant internal systems. I find that the Policyholder Register reflects the results of all reasonable efforts to identify policyholders with "active risks" and their contact information, using information sources reasonably available to SRAU, and that the Policyholder Register is as complete as practicably possible. Subject to the following condition and qualification, I am satisfied that it is reasonable and appropriate to restrict notification of the Approved Summary to persons identified using the internally-defined category of "active risks", noting in particular the nature of the Scheme as involving an inter-group reorganisation of predominantly reinsurance operations.
24 As was conveyed to SRAU at the interlocutory hearing, the correspondence to be sent to policyholders attaching the Approved Summary must include a link to the website address at which the relevant documents can be accessed and make clear that full copies of the Scheme, Approved Summary, Approved Notice and the actuarial report prepared in relation to the Scheme are available to be viewed at that address.
25 I also raised with Mr Owens my concern that the steps proposed by SRAU may be insufficient as they relate to holders of long-tail direct insurance risks which do not fall within the internal definition of "active risks". Whilst it is not clear how many of the 13 direct insurance policies involve long-tail risks, it was submitted, and it is accepted, that at least some direct insurance policies involve long-tail risks. For that reason, SRAU must also ensure that all direct insurance policyholders, including those that are not on the Policyholder Register, be provided with a full copy of the Approved Summary.
26 SRAU, while acknowledging that there is a possibility that holders of reinsurance policies under foreign insurers will not receive notification of the transfer, submits that it has no reason to believe that this is a substantial group. I am satisfied that SRAU's undertaking to publish a copy of the Approved Notice in The Insurer will address this possible deficiency.
27 It is unnecessary to refer to all the decisions of this court that have dealt with the proper approach to applications such as this. It sufficies to say that, in reaching my conclusion, I approached this matter by reference to the principles set out in: Re Insurance Australia Limited [2004] FCA 524; 139 FCR 450; Westport Insurance Corporation, in the matter of Westport Insurance Corporation [2009] FCA 1357; HDI-Gerling Australia Insurance Company Pty Limited, in the matter of HDI-Gerling Australia Insurance Company Pty Limited (ABN 16 069 985 196) [2010] FCA 505; Application of Gordian RunOff Limited under the Insurance Act 1973 (Cth) [2013] FCA 983; AAI Limited, application under the Insurance Act 1973 (Cth) [2015] FCA 452; 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; Gordian Runoff Limited, in the matter of Gordian Runoff Limited [2016] FCA 344; W.R. Berkley Insurance (Europe) Limited, in the matter of Division 3A of Part III of the Insurance Act (1973) [2016] FCA 374; Atradius Credit Insurance N.V., in the matter of Atradius Credit Insurance N.V. [2016] FCA 1107; Gordian Runoff Limited, in the matter of Gordian Runoff Limited [2016] FCA 1190; Insurance Australia Limited, in the application of Insurance Australia Limited [2016] FCA 1387; AXIS Specialty Europe SE (Australia Branch), in the matter of AXIS Speciality Europe SE (Australia Branch) [2016] FCA 1594.
28 Given the circumstances attending the preparation of the Scheme, I am satisfied that it is not necessary for SRAU to comply with s 17C(2)(c). In coming to that conclusion I rely, in particular, on the following:
(1) Mr Claxton appeared on behalf of APRA at the interlocutory hearing and did not object to the application for dispensation;
(2) APRA has been closely involved in the transfer process;
(3) I am satisfied on the basis of the information contained in Mr Davidson's affidavits and oral evidence that the errors identified in the second affidavit do not reflect a systemic flaw in the process used to identify and compile the Policyholder Register;
(4) I am satisfied on the transparent and detailed evidence of Mr Davidson that it is reasonable to limit notification to policyholders with "active risks" subject to: (i) the condition that the correspondence includes a link to the appropriate website and a clear notification that the website contains full copies of all relevant documents; and (ii) the qualification that all direct insurance policyholders be notified in the same way;
(5) I am satisfied on the basis of the material before me that all reasonable steps will be taken by SRAU to notify the affected policyholders; and
(6) Dean Carrigan, solicitor for SRAU, has given affidavit evidence that further affidavits will be filed in due course evidencing SRAU's compliance with the proposed orders.
29 At the interlocutory hearing, SRAU handed up slightly amended orders. I dispensed with the need for filing and these orders were taken to be the form of an amended interlocutory application.
30 SRAU, with APRA's agreement, has since provided further amended orders to reflect the discussion at that interlocutory hearing. I am prepared to make these orders.
31 This matter is presently listed for hearing on 24 October 2019, at which time the application for confirmation of the Scheme will be heard.
I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Allsop.