Portfolio transfer or asset transfer as a run-off instrument for insurance companies

The ongoing phase of low interest rates and the stricter capitalization requirements of the Swiss Solvency Test (SST) mean that insurers are increasingly combing their portfolios for unprofitable or capital-intensive business and, as a result, are no longer writing the unviable business (run-off). In order to reduce the technical provisions on the books, the active reduction of run-off portfolios is becoming increasingly popular. This can be done by transferring a company, a portfolio or assets. In doing so, the run-off portfolio is finally settled for the transferring insurer. Another possibility is the (retrospective) reinsurance (commutation) of the business, a purely balance sheet-related adjustment of the run-off portfolio. In the following, portfolio transfer and asset transfer will be dealt with in more detail.

 

Portfolio transfer

For the transfer of a Swiss insurance portfolio (this includes all insurance contracts entered into by an insurance company and still ongoing with policyholders domiciled in Switzerland), art. 62 of the Insurance Supervision Act (ISA) is relevant . Such a transfer requires the approval of the Swiss Financial Market Supervisory Authority (FINMA). FINMA approves the transfer of the insurance portfolio if the interests of the insured persons are safeguarded overall. The interests of the policyholders of the transferred portfolio as well as those of the other policyholders of the transferring and acquiring insurance company are taken into account. Upon approval, the corresponding insurance contracts (with the exception of any reinsurance contracts covering the risks from the transferred insurance portfolio, for which the approval of the respective reinsurer is required in each case) are transferred by law to the acquiring insurance company by means of universal succession. The consent of the policyholders affected by the transfer is not required for the transfer. In return, the policyholders who do not agree to the transfer have a right of termination. The transferred insurance portfolio includes the corresponding technical provisions. As part of the transfer of the portfolio, the acquiring insurance company must set up corresponding provisions and the transferring insurance company must release them. Accordingly, the values of the tied assets (or equivalent values) are transferred by law to the acquiring insurance company by means of universal succession, unless FINMA orders otherwise. The main points of the portfolio transfer must be regulated between the transferring and the acquiring insurance company in a transfer agreement. These include in particular the specification of the insurance portfolio concerned (inventory), the time of transfer, the purchase price, regulations on technical provisions and tied assets, and the delimitation of responsibilities for settling claims. If FINMA approves the transfer of the insurance portfolio, the acquiring insurance company is obliged to inform the policyholders taken over individually about the transfer and the right to terminate the contract within 30 days of the opening of the approval. The policyholders have the right to terminate the insurance contract within 3 months of the individual information, unless FINMA exceptionally orders the exclusion of the right of termination.

 

Transfer of assets

In practice, there is usually a need to transfer to the acquiring insurance company, together with the insurance portfolio to be transferred, the infrastructure necessary for managing the insurance portfolio (policy management systems, etc.) and other related assets and liabilities. Such a transaction, in which not only insurance contracts but also other assets are to be transferred, is usually governed by the rules on the transfer of assets according to the Merger Act (Merger Act; Art. 69 ff. FusG). As in the case of portfolio transfer under art. 62 ISA, the transfer of assets under the Merger Act also requires the conclusion of a transfer agreement between the transferring and the acquiring insurance company, which in particular contains an inventory of the assets and liabilities to be transferred. The transfer of assets becomes legally effective upon entry in the Commercial Register. Upon entry, all assets and liabilities listed in the inventory are transferred by law to the acquring insurance company by means of universal succession. This also applies in principle to the contracts listed in the inventory, including insurance contracts. According to prevailing doctrine, approval is not required. The question arises as to how the provisions of art. 62 ISA (in particular FINMA authorisation requirement, right of termination by the policyholder) are to be taken into account in such a transaction, in which other assets in addition to insurance contracts are to be transferred. In FINMA's view, the transfer of assets including insurance contracts also requires prior authorisation, whereby the conditions for granting authorisation correspond to those for portfolio transfers. Thus, insurance contracts by means of asset transfer are transferred upon registration in the Commercial Register, whereby prior approval from FINMA must be obtained. This is appropriate, as policyholders are no less in need of protection in the event of a transfer of assets than in the case of a pure portfolio transfer. According to prevailing doctrine, however, in contrast to a pure portfolio transfer, policyholders do not have a right of termination in the case of a transfer of assets involving insurance contracts. This is because such a right of termination would unjustifiably privilege policyholders over the other contractual partners of the transferring insurance company.

 

Conclusion

Run-offs and their active management are becoming increasingly important for insurance companies. Portfolio transfer and asset transfer is one of the possibilities to finally settle the run-off. While art. 62 ISA is relevant in the case of a pure portfolio transfer, the variant that often meets a practical need, according to which, in addition to the insurance portfolio to be transferred, the related assets and liabilities should also be transferred, is basically based on the rules for asset transfer according to the Merger Act. It should be noted that FINMA is of the opinion that the transfer of assets including insurance contracts also requires prior approval by FINMA. However, in contrast to the legal situation with pure portfolio transfers, the policyholders affected by a transfer should not have a right of termination within the framework of a transfer of assets.

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