The recent decision of Re AXA (Hong Kong) Life Insurance Co Ltd[i] highlights the Court’s role in the transfer of a Hong Kong long term insurance business. In this instance, the Court approved the intra-group transfer of AXA (Hong Kong) Life Insurance Company Limited’s (“AXA HK”) long term business to AXA China Region Insurance Company (Bermuda) Limited (“AXA CRIB”).
Under Section 24 of the Insurance Companies Ordinance (Cap. 41) (the “Ordinance”), the High Court is required to sanction a scheme for the transfer (in whole or part) of a long term business[ii] to another authorised insurer[iii].
In summary, Section 24 of the Ordinance requires that (among other things):
- the transferee is an insurer authorised to carry out long term business;
- a petition is filed with the Court of First Instance of the High Court to sanction the transfer;
- the petition is accompanied by a report of an independent actuary regarding the terms of the transfer;
- a notice is published the Gazette and both an English and Chinese language newspaper;
- a statement is issued to all policyholders and members of both the transferor and transferee, which sets out the terms of the scheme of transfer and summarises the independent actuarial report; and
- a copy of the statement and the petition is served on the Insurance Authority at least 21 days before the Court hearing.
The intended purpose of transferring AXA HK’s long term business to AXA CRIB was to increase efficiency within the AXA Group. In particular, it was expected to assist AXA with its capital management, audit and regulatory compliance and handling of administrative matters.
The key consequence of the proposal was that all of AXA HK’s policies would be transferred to AXA CRIB. In other words, AXA HK’s policyholders would need to enforce their rights under the policies against AXA CRIB.
Importantly, AXA CRIB was already authorised to carry on long term insurance business in Hong Kong. In addition, AXA HK and AXA CRIB submitted an independent actuarial report which opined that the transfer would not adversely impact on either party’s policyholders. The report concluded that after the transfer AXA CRIB would have a solvency ratio that was still well above the Hong Kong market average.
In this context, a small number of individual policyholders had filed objections to the transfer[iv], which were based on concerns (among others) that AXA CRIB (which is a Bermudan company) was not subject to Hong Kong law and that disputes under the relevant policies would need to be litigated in Bermuda.
In light of the evidence, the Court found that the transfer was both well intentioned and commercially justified. It was held to be fair and thus sanctioned by the Court. In particular, the Court emphasised that:
- The rights of the policyholders will be unchanged after the transfer. They are not, on any reasonably foreseeable basis, likely to be adversely affected in any significant way.
- Having been kept fully informed throughout the process, and after considering all relevant circumstances, the Insurance Authority has made it clear that it had no reason to object to the transfer.
- In relation to the objections of policyholders, it is not true that AXA CRIB will only be regulated by Bermudan law. As an authorised Hong Kong insurer, AXA CRIB is subject to Hong Kong law (including the Ordinance) and the regulation of the Insurance Authority. In addition, AXA CRIB has a substantial business presence in Hong Kong. Given that the terms and conditions of AXA HK’s policies will remain unaltered, it was unfounded to suggest that the policies would need to be enforced against AXA CRIB in Bermuda after the transfer.
The test to be applied
While Section 24 of the Ordinance provides the Court with the absolute discretion to sanction a proposed transfer, the Court would[v]:
- give due recognition to the commercial judgment entrusted by the insurance company’s constitution to its directors;
- give close attention to the independent actuarial report submitted[vi] when comparing the financial security and reasonable benefit expectations of policyholders before and after the transfer;
- give close attention to the Insurance Authority’s opinion on whether policyholders are likely to be adversely affected; and
- be concerned with whether a policyholder, employee or other interested person or any group of them will be adversely affected by the transfer.
However, the fact that an individual policyholder or groups of policyholders may be adversely affected does not mean that a transfer has to be rejected. The Court found that the fundamental question is whether the scheme of transfer (as a whole) is fair as between the interests of the different classes of persons affected.
Otherwise, the Court will not:
- intervene to produce the best possible scheme of transfer in its view. That decision lay with insurance company’s directors;
- be concerned with the details of the transfer, provided that it is found to be fair; or
- amend the scheme of transfer because it thinks that individual provisions could be improved upon.
In arriving at its conclusion, the Court will first determine what the contractual rights and reasonable benefit expectations of policyholders were before the scheme was promulgated and then compare those with the likely rights and expectations of policyholders if the transfer is approved.
What it means to you
The Court’s decision clarifies that it will take a broad approach when considering the transfer of a long term business. It will examine whether the transfer (as a whole) was fair for all affected parties. In this way, the objections of a few policyholders are unlikely to prevent a transfer from being sanctioned.
It follows that an individual policyholder will have no legal recourse if he/she is dissatisfied with a Court sanctioned transfer. The only exception is where the policy expressly provides for a potential remedy (e.g. the cancellation and refund of any premium paid on the policy). While the Court’s “gatekeeping” role provides a strong safeguard for policyholders, brokers acting for sophisticated insureds may wish to consider if their clients require a contractual provision to protect their specific interests or to provide them with greater flexibility if their insurer proposes to transfer its business.
For insurers, the case is a timely reminder to review their existing policies to determine if they adequately address the potential transfer of their business.
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This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.
[i]Unreported, HCMP No. 1647 of 2012, 16 October 2012.
[ii]For classes of long term business, see Part 2, Schedule 1 of the Ordinance. Examples include life and annuity, marriage and birth, linked long term and permanent health.
[iii]The Court’s supervisory role only applies to the transfer of a long term business. Under Section 25D of the Ordinance, the Insurance Authority is responsible for approving the transfer of a general insurance business.
[iv]Section 24 of the Ordinance provides that the Insurance Authority and any persons alleged to be adversely affected by the transfer must be heard by the Court.
[v]The Court followed the approach in Re Winterthur Life  3 HKC 34, where Kwan J (as she then was) adopted the principles derived from Re London Life Association Ltd (21 February 1989, unreported).
[vi]The Court also found that Section 29 of the Ordinance required only one independent actuarial report to be submitted on behalf of both the transferee and the transferor.