The Independent Expert
Mr Carmine Papa of PKF Littlejohn LLP has been appointed by Lloyd’s as an Independent Expert. His appointment has been approved by the Prudential Regulation Authority (“PRA”) in the UK, in consultation with the Financial Conduct Authority (“FCA”). His role is to consider the impacts of the transfer on all policyholders. He has written a report of his considerations and findings for the Court to consider.
Mr Papa’s principal conclusion is that no policyholder will be adversely affected by the transfer.
Carmine Papa, is a Partner of PKF Littlejohn LLP and a Fellow of the Institute of Chartered Accountants in England and Wales. He has been involved with the Lloyd’s insurance market in a number of capacities for the last 35 years, including assessment of the Lloyd’s Syndicates insurance liabilities and assessing the quality of the actuarial projections to assess those liabilities.
He has been appointed by Lloyd’s to act as the Independent Expert in connection with this transfer. His appointment has been approved by the PRA in consultation with the FCA. He has no financial interest in the Corporation of Lloyd’s or Lloyd’s Insurance Company S.A. (“Lloyd’s Brussels”)
PKF Littlejohn LLP currently acts as auditors and professional advisers to a number of Syndicates. Currently the Independent Expert does not have direct involvement with Syndicate audits nor does he currently advise Syndicates in a professional capacity. Neither PKF Littlejohn LLP nor the Independent Expert have acted for the Corporation of Lloyd’s for at least the last 10 years and have never acted for Lloyd’s Brussels in any capacity.
The Independent Expert’s report can be accessed via the Document Library. Due to its technical content his full report is only available in English. A summary of his full report is available in French, Spanish Italian, German and Dutch.
Independent Expert Report
The Independent Expert’s full report can be accessed below as a pdf download. For ease of reference, the full report is also available to view in the drop down boxes below, chapter by chapter.
Chapter 1: Introduction
1.1 Background to the proposed transfer
1.1.1 On 23 June 2016, a majority of the people who voted in the European Union (EU) referendum voted for the UK to leave the EU. Following this vote, on 29 March 2017 the UK Government informed the Council of the European Union that it intended to leave the EU under Article 50 of the Lisbon Treaty. The original withdrawal date was to be 29 March 2019, but this date has been extended and on 24 January 2020 the UK and the EU signed an agreement (Withdrawal Agreement) which took the UK out of the EU with effect from 31 January 2020. The Withdrawal Agreement has a transition period which ends on 31 December 2020.
1.1.2 Following the transition period, absent any agreement otherwise, UK domiciled insurance entities (including Members at Lloyd’s) will no longer be able to underwrite and service insurance contracts already written, throughout the European Economic Area (EEA) using their current Freedom of Services and/or Freedom of Establishment Permissions.
1.1.3 Servicing of insurance contracts will include the settlement of claims currently notified, or notified in the future, attaching to Lloyd’s policies written between 1993 and 2020 where the Policyholder is located in the EEA and/or where all or part of the Policy relates to EEA risks.
1.1.4 Policies written prior to 1 January 1993 were transferred to Equitas Insurance Limited under a previous transfer under Part VII of the UK Financial Services and Markets Act 2000 (FSMA) and so do not form part of this transfer.
1.1.5 As a result of the above changes post the transition period, and subject to any new transitional measures agreed between the UK and the EEA, the Members of Lloyd’s acting through their Syndicates, will no longer be able to service policies which fall within the jurisdiction of the EEA regulators without breaching legal or regulatory authorisation requirements in the EU (ignoring any temporary domestic permissions regimes). In particular, following the loss of passporting rights, the payment of claims to policyholders and other activities in respect of the Transferring Policies may be subject to regulatory or criminal sanctions.
1.1.6 Certain EEA member states have announced that they will apply a temporary national run off regime for policies of UK based insurers following Brexit (Temporary Run Off Regime). Such measures would mean that Transferring Policies subject to a Temporary Run Off Regime would not immediately need to be transferred under the Scheme. However, notwithstanding the operation of these Temporary Run Off Regimes, Lloyd’s has decided to transfer all policies that would otherwise fall within the scope of a Temporary Run Off Regime on the basis that such an approach provides a more certain and permanent solution to Brexit.
1.1.7 In my opinion, unravelling parts of the Scheme to take account of the Temporary Run Off Regimes would result in significant impracticality for Lloyd’s and its Members and further uncertainty for policyholders (not least because of the differing approaches and time periods to such temporary regimes across EEA member states). This would leave open the risk that a further transfer would be required at a later stage to sweep up any residual policies which are no longer protected by a Temporary Run Off Regime. In my view there can be no certainty that any Temporary Run Off Regime will be sufficiently adequate and enduring to protect policyholders on a long term basis.
1.1.8 Lloyd’s has, therefore, decided to transfer those policies (or parts of policies) which fall within the definition of “Transferring Policy” to Lloyd’s Insurance Company SA (LIC). LIC is a public limited insurance company registered in Belgium and regulated by the Banque Nationale de Belgique (NBB) and the Financial Services and Markets Authority (Belgian FSMA) (responsible for the equitable treatment of financial consumers and the integrity of the financial markets) to write certain classes of insurance business. Details of how the proposed Part VII transfer will operate are summarised in Section 4.
1.2 Scope of this report
1.2.1 Any proposed transfer of insurance business from a UK entity to another entity, whether resident in the UK or elsewhere, has to be sanctioned by the High Court of England and Wales (Court) pursuant to Part VII of FSMA. Section 109 of FSMA requires a report to be prepared for the Court by an expert (the Independent Expert) to aid it in its deliberation. The purpose of this report is also to inform the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA) and Lloyd’s Policyholders (including third party claimants against those Policyholders) of the impact of the proposed transfer on the security and service levels of both transferring and non-Transferring Policyholders.
1.2.2 This report has been prepared under Section 109 of the FSMA in a form approved by the PRA in consultation with the FCA. The report has been prepared in accordance with PRA guidance on Expert Reports published on 26 July 2018 and the FCA’s approach to the review of Part VII insurance business transfers published on 29 May 2018. This report also complies with applicable rules on expert evidence and SUP18 of the FCA Handbook. Should other parties choose to rely in any way on the contents of this report, then they do so entirely at their own risk.
1.2.3 To the fullest extent permitted by law, PKF Littlejohn LLP and I will accept no responsibility or liability in respect of this report to any other party, other than as set out in my firm’s engagement letter. This report is also subject to the terms and limitations of liabilities set out in the above engagement letter. An extract of my engagement letter which sets out the scope of my work is contained in Appendix 2.
1.3 Transfer scope
1.3.1 This report covers the proposed Part VII transfer of certain insurance business of certain Members, former Members and estates of former Members at Lloyd’s for any of the 1993 to 2020 years of account in respect of current and potential insurance liabilities attaching to policies, or parts thereof, written by those Members which, immediately after the transition end date, require an authorised EEA insurer to carry out or service such a Policy (or part thereof) in order to ensure no legal or regulatory insurance authorisation requirements in the EEA are breached.
1.3.2 Included in this Scheme will be certain EEA risks which do not require an authorised EEA insurer to administer these policies following the transition end date.
1.3.3 The majority of policies subject to the Part VII transfer were written with inception dates between 1 January 1993 and 31 December 2018. Lloyd’s intention was to ensure all policies written from 1 January 2019 with an EEA element were written through LIC. However, the scope of the transfer was extended to cover a limited number of EEA policies written by Members for 2019 and 2020 for the following reasons:
a number of Coverholders were not able to set up the required procedures by 31 December 2018 and Lloyd’s granted an extension to certain Managing Agents to allow about 300 Coverholders to continue to write EEA business, the last extension expiring on 12 April 2019;
as a result, Xchanging continued to accept EEA business under a Lloyd’s Syndicate stamp up to 12 April 2019;
certain in-scope inwards reinsurance business, but only where the cedant is domiciled in Germany, will continue to be written by Members in 2020.
1.3.4 The Part VII transfer does not cover the assets and liabilities, or potential liabilities, attaching to the following:
policies that are Long-Term Insurance Contracts (life policies)
Non-EEA Policies (as defined in the Scheme Document)
policies not capable of being transferred pursuant to Section 111 of FSMA (if any)
a policy, or part thereof, which would otherwise fall within the definition of an EEA Policy, but which was written subject to the Lloyd’s licence in Australia, Canada, Hong Kong, Singapore, South Africa and/or Switzerland (the Excluded Jurisdiction Policies)
any Non-Insurance Liabilities of the Members arising in connection with the Part VII transfer, such as Conduct Liabilities or Tax liabilities.
Excluded Non-Insurance Liabilities include, amongst others, the following:
Liabilities of Members not arising in connection with the Transferring Business.
Liabilities/obligations arising in connection with the sale, management or conduct of the Transferring Policies prior to the date of transfer including mis-selling liabilities, losses and obligations arising from:
- complaints, claims, legal action or settlements
- failure by Members to comply with applicable law/regulations or industry practise
- penalty fines levied as a result of any judgement or arbitration in respect of the above.
Legal costs in investigating and defending the above.
Tax liabilities arising, or relating to the period, prior to the date of transfer arising in connection with the Transferring Business.
1.3.5 For clarification purposes, the proposed Part VII transfer is intended to cover the following policies (or parts thereof), if not excluded under the above paragraph:
direct insurance policies written which relate to EEA situs risks or have been issued to Policyholders resident in the EEA
multi-jurisdiction direct insurance policies which have been issued to Policyholders resident in the EEA or part of the risk situs is within the EEA. Only the EEA part of the Policy is subject to the Part VII transfer
inward reinsurance policies written where the cedant is domiciled in Germany.
1.3.6 In summary, policies which will transfer under the Scheme are:
(a) policies (or parts thereof) identified as at the Effective Date which are not Excluded Policies and fall into one of the following categories:
Category 1: policies which have been identified as having a risk situated in the EEA and/or a policyholder resident in the EEA;
Category 2: policies which have been identified as being multijurisdictional policies which may have EEA risk elements and the policyholder is either unknown or a non-EEA resident and it has not been possible to determine with sufficient certainty that they are Transferring Policies. Such policy will be a Transferring Policy if it is determined (at the point when sufficient information is available) that the policy relates to a risk situated in the EEA or was issued to a policyholder resident in the EEA;
Category 3: policies which have been identified but Lloyd’s has not yet determined whether or not the policy covers a risk situated in the EEA and/or is issued to or is held by a policyholder resident in the EEA and it has not been possible to determine with sufficient certainty that they are Transferring Policies. Such policy will be a Transferring Policy if it is determined (at the point when sufficient information is available) that the policy relates to a risk situated in the EEA or was issued to a policyholder resident in the EEA
(b) policies (or parts thereof) which are not identified as falling within the above categories and which immediately after the Transition End Date will require an insurer authorised by an EEA regulator to carry out or service such policy in order to ensure no legal or regulatory insurance authorisation requirements in the EEA are breached and are not Excluded Policies.
1.3.7 An overview schematic of the policies in-scope of the proposed Lloyd’s Part VII transfer is set out below.