Proposed Amendments to Insolvency Provisions for Insurers

What effect will the government’s proposals have on insurers, policyholders and other stakeholders?

In May 2021, the government published a consultation on ‘Amendments to insolvency agreements for insurers’, with proposals to ‘improve and clarify’ certain aspects of the existing UK insolvency regime for insurers, including the power for the court to order a ‘reduction’ insurance contracts.

The five proposals consulted are presented in the box below. In a response to the consultation published in April this year, the government responded to concerns that had been raised, in particular about the effect of the proposals on an insurer’s financial and other counterparties. In the remainder of this article, we examine key propositions 1 and 3 in more detail.

Amendments to Insurer Insolvency Provisions: Proposals
  1. Extend and clarify the court’s existing power under section 377 of the Financial Services and Markets (FSMA) Act 200 to order a reduction (“impairment”) of the value of an insurer’s contracts
  2. The creation of a new court-appointed position of “impairment manager” to oversee the impairment process

  3. The establishment of a moratorium on the exercise of certain contractual rights to terminate service contracts and financial contracts upon petition for and during administration and impairment, or upon presentation of a petition for liquidation

  4. The introduction of a suspension of the rights of suspension of the insured in life insurance contracts upon petition in court for and during administration and depreciation, or upon presentation of a petition for liquidation

  5. Changes to the way the Financial Services Compensation Scheme works to ensure protected policyholders are not financially aggravated by impairment

Proposal 1: “Impairment” of insurer liabilities

Section 377 of the FSMA gives the court the power to reduce the value of one or more contracts of an insurer instead of making a winding-up order. To date, this stand-alone provision has not been tested in the “toolbox” of struggling insurers, and the government proposes to create the necessary legislative framework to make it a useful alternative option for insurers in financial difficulty.

This includes the definition of the parties who can request an impairment and the conditions for sanction. To sanction an impairment, it is proposed that the court must be satisfied (i) that the insurer is, or is likely to become, unable to pay its debts, and (ii) that the impairment would reasonably be likely to result in a best result for all of the insurer’s creditors, including its policyholders, compared to the next most likely scenario. Any request would also require the prior approval of the PRA.

Other key aspects of write-down proposals include a moratorium on legal proceedings and the enforcement of collateral, and the ability for liabilities to be “reassessed” at a later date, either if the insurer’s financial condition improves, or if the insurer enters into formal insolvency proceedings. However, as long as the writedown is in effect, the insurer’s balance sheet will only reflect the “reduced” amounts.

In the box below, we set out the effect of the proposed impairment procedure on some key stakeholders:

Effect of impairment on key stakeholders

Secured creditors

Holders of fixed charges will be excluded from the scope of the depreciation. Floating charge carriers will remain within the scope of impairment. The moratorium on legal proceedings will suspend the right of secured creditors to enforce the security. No mention is made of letter of credit holders, but they may not be able to draw on a letter of credit to complete the depreciated amount, as there would be no “default” on the part of the insurer.

Direct insured

Policyholders will be within the scope of any depreciation. They will not have the right to be consulted on the proposals. Their rights are not extinguished – they can be “liquidated” later if the insurer’s financial situation improves.


Excluded from the scope of the impairment. Labor courts will be exempted from the moratorium on legal proceedings.

Financial counterparties

Financial contracts as defined in Schedule ZA2 of the Insolvency Act 1986 will be excluded from the scope of impairment – this covers financial contracts including swaps, derivatives, repos and loans of titles. However, bonds issued by the insurer will be included in the depreciation.


Amounts due to suppliers in relation to the period preceding an impairment (arrears) will be included in the scope. Outstanding payments for goods and services provided during depreciation will be due in full.


As part of the depreciation. The proposals do not specifically require the court to take into account the legal priority given to direct insurance creditors, but the government says that any impairment plan that does not generally comply with the legal hierarchy of creditors would be little likely to be sanctioned.

Reinsurers (outward)

A statutory variant of the pay-as-paid doctrine is proposed, specifying that any impairment of liabilities will not affect recoveries under any ceded reinsurance. This could only affect UK reinsurance contracts and would not be binding on foreign reinsurers.


It is proposed to limit the payment of dividends and other distributions to shareholders, to prevent shareholders from unfairly benefiting at the expense of creditors while an insurer is in impairment proceedings.

Proposal 3: Moratorium on ipso facto termination rights

Along with the general moratorium mentioned above on the impairment process, a separate moratorium on certain contractual rescission rights in service and financial contracts with insurers is proposed. This will take effect upon a legal petition for and during a reorganization or impairment procedure, or upon presentation of a petition for liquidation.

The proposed moratorium would prevent the exercise of rescission rights in financial and service contracts, where such rights result solely from the insurer’s commencement of insolvency or impairment proceedings (referred to as “ipso factoclauses”). The insurer must continue to fulfill its substantial obligations under the relevant contract on an ongoing basis.

Counterparties may apply to the court for a waiver of the moratorium where this will cause financial hardship. However, as the moratorium will be subject to the insurer continuing to meet payment and other material obligations under the relevant contracts, it is believed that the hardship exemption will rarely be invoked.

Liquidation compensation

Concerns were raised during the consultation process about the impact of the “ipso facto” moratorium on the ability of counterparties to terminate or “close” derivative contracts with an insurer before it enters insolvency proceedings.

Upon entry into receivership or liquidation, insolvency netting rules come into effect, which would affect the application of close-out netting with respect to derivative contracts of insurers . The increased risk and uncertainty for financial counterparties could have a negative effect on the cost and availability of derivatives for UK insurers.

In response to these concerns, the government has said it will introduce a targeted exemption for netting and netting agreements (and associated security and title transfer agreements). However, the government does not seem to consider the file as completely closed, and proposes to take a delegation of power to modify the scope of this moratorium.

Look forward

It is likely that the proposed write-down power will be useful in fairly limited circumstances. It is expected to be most likely to be used in the retail life insurance sector, where it could help by providing continuity of cover for policyholders who may find it difficult to obtain similar cover elsewhere on the market. market. Due to the uncertainty regarding overseas recognition and the potential effect on the rights of creditors in contracts governed by non-UK law – for example in relation to letters of credit – there seems little likely suitable for insurers or reinsurers with large non-domestic portfolios.

The government intends to legislate for these proposals when parliamentary time permits. Of potentially wider impact, the government is currently studying a proposal for a specific resolution regime for insurers aligned with internationally agreed standards and best practices. We await further details on the proposal and how it will interact with the current options available to insolvent insurers.

About Terry Simmons

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