Insurance is a unique business: premiums are paid today, with claims paid over the sometimes extended future. Until recently, focus in the run-off sector has been upon the insurers, with the ability to take over legacies, adopt aggressive commutation strategies, and ultimately promote schemes of arrangement. However, this is only one side of the coin.
The placement of those risks is often made through brokers and managing general/underwriting agents (MGA’s), who after placement have equally long standing duties to their clients to deal with those claims, often holding all placing files, and perhaps even considerable client money/risk transfer money balances within their NST or other trust accounts.
There has been much recent focus on the run-off of brokers and MGA’s, and effecting and paying for this. This is not a new market, but the possibility of brokers and MGA’s becoming insolvent, going into run-off or simply wanting to pass over responsibility for this run- off obligation. What are the basic options:
- to buy the broking/MGA company in run-off- this means it is bought “warts and all”
- to buy the broker/MGA business and balance from either the run-off broker/MGA or even just part of the old years of an on-going broker/MGA
- to have an outsourcing of the run-off function, leaving the primary liabilities and responsibilities behind.
There are many issues that apply to all of these including:
- Professional indemnity- if you buy the broking/MGA company, you take these on unless they can be passed back to the seller. If you buy the business, this is not the case, but you will be required to have this under FSA rules. On an outsourcing, the outsourcing broker/MGA will require this.
- Client and Risk Transfer monies - the FSA and any selling/outsourcing broker/MGA will require all client monies to remain within an NST or risk transfer monies to remain in the relevant trust account. These are trust monies, and cannot simply be used by the buyer/ outsource provider to fund operations. Therefore, the seller/ outsourcing broker will need to contribute to the cost going forward. This has accounting and tax implications too.
- Client debtors and creditors- At law, client/risk transfer monies and balances cannot simply be passed across from one broker/MGA to another, unless the clients’ prior consent is obtained. One can assign a benefit, but the burden cannot be assigned - it must be novated.
- Credit write backs (broker only)- it is often assumed that if after 6 years, a client hasn’t claimed any client monies due to it from the broker, then limitation applies, and the broker can take these monies into its own account. Many brokers have over the years indeed taken large balances in this way. However, it is suggested that this is fraught with danger, and great care must be taken if this is part of the assumed “gain” to be made by taking over a broking company.
- Other Contingent Liabilities- the most serious of these are likely to be leasehold property liabilities and liabilities in respect of final salary schemes. Due diligence is essential here.
- Tax- if buying the company, the buyer inherits its tax position, and indemnities in this respect should be sought. If buying the business or effecting an outsourcing, VAT issues must be considered.
- Employees- if either the broking/MGA company or its business is bought, it is likely that the buyer will either directly or through TUPE inherit the employees, and all liabilities that follow them. Usually indemnities can be sought.
- Regulatory - if the broker/MGA is to be sold, then there is a need for FSA approval to change of controller. If the business is to be passed, or a material outsourcing to occur, then again the FSA should be consulted.
Therefore, whilst buying broker/MGA legacy may seem attractive, it is fraught with difficulties, and the burden may outweigh the benefit.