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Insurance Portfolio Transfers
by Adv. Rachel Levitan and Adv. Yael Navon
General
Can insurance portfolios be transferred from one entity to another in Israel?
There is no specific law dealing with the transfer of insurance portfolios, however an insurance portfolio can be transferred in accordance with the general legal principles of contracts, corporations and insurance as detailed hereunder.
Can reinsurance portfolios be transferred?
Yes as above.
Are the rules the same for the transfer of direct insurance portfolios as for reinsurance portfolios?
Both the transfer of insurance business and reinsurance business are subject to the Contracts Law (General Part) - 1973 (hereinafter: the Contracts Law) and to the Assignment of Obligations Law - 1969 (hereinafter: the Assignment of Obligations Law). In addition, both transactions are subject to the procedures set under the Companies Law - 1999 (hereinafter: the Companies Law) for approval of an arrangement with a company's creditors (see further details hereunder).
However, insurance companies are subject to the Supervision over Financial Services (Insurance) Law - 1981 (hereinafter: the Supervision Law), which requires the approval of the Commissioner of Insurance to the Insurance Portfolio Transfer, while reinsurance business is not subject to the said law.
Are the rules the same for the transfer of life portfolios as for non-life portfolios?
Yes.
What are the requirements for an Insurance Portfolio Transfer ("IPT")?
What requirements must be met by a transferor to undertake an IPT?
There is no specific law which deals with an Insurance Portfolio Transfer and thus, such transaction is subject to the general rules which apply to transferring business from one company to another. According to Section 6 of the Assignment of Obligations Law, generally, the liability of a debtor can be transferred by an agreement between the debtor and the transferee; however, such agreement must receive the consent of the creditor. Accordingly the transfer of an insurance portfolio from one insurer to the other requires the consent of the insureds.
The Companies Law sets a procedure according to which a company may reach an arrangement with its creditors without receiving a specific agreement from each creditor. This procedure includes receiving the court's approval for calling a creditor's assembly, approving the arrangement with a majority of three-forth's of the voting powers and eventually receiving the court's approval for the arrangement. After following this procedure the arrangement binds all creditors including those which did not participate in the creditors' assembly or which objected to the arrangement.
In Insurance Portfolio Transfers which were made in the past in Israel, the transferor acted in accordance with the procedure set in the Companies Law, and received an approval of the transaction in creditors' assemblies (including assemblies of insureds, brokers and other creditors of the company) and in court.
Another requirement which must be met by the transferor is set under Section 63 of the Supervision Law, pursuant to which an insurer which decided to cease writing insurance - generally or in a certain branch - is required to immediately notify this decision to the Commissioner of Insurance.
What requirements must be met by a transferee to undertake an IPT?
The IPT requires the approval of the Commissioner of Insurance who will assure that the transferee has a license to carry out insurance business in the relevant field and examine the financial condition of the transferee in order to ascertain that its financial strength is sufficient and that the insureds will not suffer form any damage from the transaction.
Are there any requirements relating to the financial condition of the transferor?
No.
Are there any requirements relating to the financial condition of the transferee?
There are no specific requirements as to the financial condition of the transferee, however, its financial condition will be examined by the Commissioner of Insurance before approving the transaction. In addition, the transferee must have sufficient means to maintain reserves for the risks accepted, similarly to every outstanding risk the insurer may have.
Is the place where the portfolio was originally underwritten a relevant factor?
The Supervision Law applies to an insurer underwriting business in Israel or to an insurer which was incorporated in Israel. A foreign insurer which does not underwrite its business in Israel is not subject to the supervision of the Commissioner of Insurance.
Is the governing law or applicable jurisdiction of the insurance portfolio transferred a relevant factor?
An insurer underwriting business in Israel will be subject to the supervision of the Commissioner of Insurance no matter the governing law or applicable jurisdiction agreed upon in the policy.
Are there any other requirements?
As mentioned, there is no specific requirement set by the Law, however the Commissioner of Insurance and the court have broad discretion and can examine any factor they find relevant.
What can be transferred along with the insurance or reinsurance contract?
(a) Assets
Assets can be transferred along with the insurance, just as in any sale of property, as far as both the transferor and the transferee continue fulfilling the rules set under the Supervision over Insurance Business (Means of Investment of the Capital and Funds of an Insurer and the Management of its Liabilities) Regulations - 2001 (hereinafter: the Supervision Regulations (Means of Investment)).
(b) Liabilities
Liabilities can be transferred subject to the agreement of the creditors (Assignment of Obligations Law).
(c) Real property
Real property can be transferred subject to the Supervision Regulations (Means of Investment).
(d) Reinsurance/retrocession contracts and other ancillary contracts
According to the Law, principally the right of a creditor can be transferred without the consent of the debtor. Therefore, in the lack of a contradicting contractual term, the right to receive reinsurance benefits can be transferred even without the reinsurers' consent. On the other hand, the duties undertaken by the insurer under the reinsurance contract cannot be assigned without the reinsurers' specific consent. In any case, if the reinsurance agreement prohibits the insurer from assigning its rights, then the contractual term must be followed.
It should be noted that in previous Insurance Portfolio Transfers made in Israel, the Commissioner conditioned his approval in receiving all reinsurers consent to the transaction.
Who must be notified of what, and how?
(a) Local regulator:
A notification must be sent to the Commissioner of Insurance for approval. The Commissioner of Insurance will examine the IPT agreement and any information which he finds relevant. Under certain circumstances the IPT agreement must also be notifies and approved by the Anti-Trust Supervisor.
As the IPT has tax implications, notification should be given to the tax authorities.
(b) Policyholders
The Policyholders should be informed of the intended IPT and they should be given the opportunity to object to the transaction within the framework of the creditor's assembly to which they will be invited.
(c) Beneficiaries of cover other than actual policyholders
The law is not clear as to the duty to notify the beneficiaries of the IPT. In our opinion no such notification has to be given.
(d) Reinsurers
Reinsurers must be notified of the IPT.
(e) Brokers
If the portfolio transferred includes the insured's obligation towards brokers then the brokers must be notified of the transaction and they should be given the opportunity to object to the transaction within the framework of the creditor's assembly to which they will be invited.
(f) Others
Any creditor of the transferor who might be damaged from the transaction must be notified.
What publicity requirements are there for IPTs?
(a) Newspapers
If the Court does not order otherwise, the IPT should be published in four daily newspapers which are widespread in Israel, one of which is in Arabic and another in Russian.
(b) Official Gazette/Journal
Not required.
(c) Trade magazines
Not required.
(d) Register of Companies
The motion to approve the IPT and the Court's decision must be notified to the Companies Registrar.
(e) Other
When a public traded insurer is involved in an IPT notification must be given to the Securities Authority.
Who has the right to object to the transfer?
(a) The Regulator
The Commissioner of Insurance and - under certain circumstances - the Anti-Trust Supervisor - have the right to object to the transfer.
(b) Policyholders
Policyholders can object to the transfer, however if the transaction was approved by the creditor's assembly, with a majority of 75% and by the Court, then this decision binds all policyholders.
(c) Beneficiaries of cover
The law is not clear as to the beneficiaries' right to object to the transfer. In our opinion, they do not have such right.
(d) Reinsurers
In cases where the reinsurance agreement restricts the insurer's right to assign its rights or duties, then the agreement term must be followed. If the agreement does not include such restriction, then basically the reinsurer cannot object to the transfer of the insurer's right to receive insurance benefits however it can object to the transfer of the insurer's duties under the reinsurance agreement. In fact, in previous IPT which were made in Israel, the Commissioner of Insurance required reinsurers' agreement to the transfer before he approved the transaction.
(e) Employees
As long as no employment agreement is breached within the framework of the IPT, then the employees cannot object thereto.
(f) Others
The IPT must be approved by creditors assemblies of all type of creditors which may be damaged as a result thereof, including insurance brokers and banks.
Who must approve and/or sanction the transfer? (Please point out any differences between domestic and cross-border transfers in this respect, where applicable)
(a) Local regulator
An approval of the transaction must be received from the Commissioner of Insurance and in certain circumstances also by the Anti-Trust Commissioner.
(b) Court
The court must approve the convening of the insureds assembly and - after the insureds assembly improves the IPT, it requires the court approval as well.
What jurisdictional conditions apply to the transfer?
What types of insurance portfolios are capable of transfer in Israel?
There is no legal limit as to the types of insurance portfolios which can be transferred.
Does the transferring portfolio need to be legally or commercially connected to the state where the transfer is effected?
There is not legal limitation in this respect, however, this can be a factor considered by the Commissioner of Insurance when examining whether to approve the transfer.
Will the transfer be effective in jurisdictions other than those of the transferor and/or transferee?
The effectiveness of a transfer which was approved by the Israeli regulator and Court in other jurisdictions depends on the local law. Generally, according to the private international law rules, the Israeli Court will give effect to a transfer made properly in the jurisdiction to which the policy is subject.
What effect will the transfer have on arbitration clauses?
If the policies included an arbitration term, the term will apply to the relationship between the transferee and the insured (C.A. 532/86 HaMoatsa Leyitsur Pirchey Noy v. Pirchey Shomron , P.D. 43(1) 252, 255).
What is the procedure and timing of the transfer?
What is a typical timeline for a transfer?
After the IPT agreement is reached, the parties act together to receive the approvals of the Commissioner of Insurance, the Anti-Trust Commissioner and of the Court. Pursuant to the Company's request, the Court can order a creditor's assembly (in our case - the insureds).
Are there any hard legislative or regulatory deadlines?
Within 14 days after the creditor's assembly approved the IPT, the company will file to Court a motion for approval of the arrangement. Any party wishing to object to the IPT can file its objection to Court. The Court's decision must be published within 48 hours after it is received by the company.
What key documentation will be produced for the transfer?
All documents connected to the portfolio transferred including the policies, lists of the Insured's claims reported and IBNR claims, sums paid, etc.
Decision of the company's board of directors approving the agreements.
Approvals of third parties which may have rights in connection with the portfolio transferred.
A list of Court claims filed against the transferer.
The agreements with the reinsurers and there consent to the transaction.
The employment agreements with the transferred employees.
Lists of insurance brokers.
Agreements with service suppliers.
What professional agents are involved in the transfer and what are their roles?
(a) Lawyers
Lawyers will be involved in preparing the agreements, handling the Court procedures and receiving the approval of the regulator of the transfer.
(b) Accountants
The accountant's involvement is required in order to handle the tax issues and other accounting aspects of the transaction for example to assure that the parties' acts comply with the Insurance Business (Means of Investment of the Capital and Funds or an Insurer and the Management of its Liabilities) Regulations - 2001.
(c) Actuaries
Actuaries assist in determining the value of the portfolio.
(d) Independent Expert
Economic experts for the evaluation of the portfolio.
(e) Other
The Court is entitled to appoint any expert it wishes to opine on the IPT.
What legal issues are frequently encountered in transfers?
Portfolio transfers are not common in Israel and thus, there are no legal issues frequently encountered. In one instance, the Supreme Court addressed the interpretation of a contractual term included in a portfolio transfer agreement. The Supreme Court ruled that similarly to any agreement, the portfolio transfer agreement should be interpreted according to the parties' intention as reflected in the wording of the agreement and if no such intention was reflected - according to the transaction (C.A. 633/88 Halevaron Insurance Co. Ltd. V. Yardenia Insurance Co. (in Liquidation) PD 45(1) 563.
How frequently is the transfer mechanism used?
The transfer mechanism is not commonly used. It is used especially in cases where an insurer faces financial difficulties and the Commissioner orders the transfer of its portfolio, or as an interim stage on the way to a full merger between insurance companies.
What alternative methods can be used to transfer insurance portfolios, and what are the advantages and disadvantages of such methods?
(a) Novation
As mentioned above, the benefits arising from a contract can be assigned without receiving the consent of the debtor. On the other hand novation can be made only if all parties consent thereto. In fact, in Israel the novation method has never been used in an Insurance Portfolio Transfer transaction.
(b) 100% reinsurance (also described as "run-off"/"portfolio"/"assumption" reinsurance or retrocession, "portfolio transfer" or "reinsurance to close")
100% reinsurance does not release the insurer from its duty towards the insured, and thus the insurer must continue maintaining certain reserves for the risk.
(c) Corporate reorganisation
The transfer of insurance portfolios was used in the past in Israel as a step in the process of merger. However in cases where the transferor wishes to transfer only part of its business within the framework of the IPT, then merger is not the proper method to be used.
(d) Arrangement/compromise
As there is no specific law dealing with transfers of portfolio, this is the procedure used in order to execute such transaction.
What are the relevant sources of law or guidance?
(a) Statutes:
The Contracts Law
The Assignment of Obligations Law
The Supervision Law
The Companies Law, Sections 350-351 (Compromise and Settlement)
The Anti-Trust Law
(b) Regulations
The Supervision over Insurance Business Regulations (Means of Investment of the Capital and Funds of an Insurer and Management of its Liabilities) - 2001
The Supervision over Insurance Business Regulations (details in financial reports) - 1998.
The Companies Regulations (Motion for Approving settlement or Arrangement) - 2002
(c) Guidance
None.
(d) Jurisprudence
C.A. 633/88 Halevanon Insurance Co. Ltd. v. Yardenia Insurance Co. Ltd. (in Liquidation) PD 45(1) 563.
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